ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-32598

_______________________________________

Entegris, Inc.

(Exact name of registrant as specified in its charter)

_______________________________________

Delaware

41-1941551

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

129 Concord Road, Billerica, Massachusetts 01821

(Address of principal executive offices and zip code)

(978) 436-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of Exchange on which Registered

Common Stock, $0.01 Par Value

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

_______________________________________________________

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes x No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerate filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the last sale price of the Common Stock on June 30, 2018, the last business day of registrant’s most recently completed second fiscal quarter, was $4,768,870,172. Shares held by each officer and director of the registrant and by each person who owned 10 percent or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.

As of February 4, 2019, 134,942,439 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders scheduled to be held on April 30, 2019, or the 2019 Proxy Statement, which will be filed with the Securities and Exchange Commission, or SEC, not later than 120 days after December 31, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 2019 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Annual Report on Form 10-K.

Entegris, Inc. (“Entegris”, “the Company”, “us”, “we”, or “our”) is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. Our mission is to leverage our unique breadth of capabilities to create value for our customers by developing mission-critical solutions to maximize manufacturing yields, reduce manufacturing costs and enable higher device performance.

Semiconductors, or integrated circuits, are key components in modern electronic devices. Smartphones, cloud computing, the Internet of Things, artificial intelligence and other applications require faster, more powerful and more energy efficient semiconductors. In response to these requirements and the growing demand from these applications, semiconductor makers have been adding more capacity and semiconductor manufacturing technology has rapidly been moving to smaller dimensions, adopting new device architectures, such as FinFET transistors and 3D-NAND, and utilizing new and innovative manufacturing materials to increase transistor and bit density. As the technology node becomes increasingly complex, to enable improvements and to maximize yields, manufacturers require the effective development and application of new materials, a reliable and consistent supply of high-value materials, and contamination-free transportation, storage and delivery of these materials, seamlessly integrated into the semiconductor manufacturing process, at ever-increasing levels of purity and contaminant control. Additionally, the effective management and maintenance of the entire materials handling system, from initial production of process chemistry, to transportation and dispensing onto the wafer, has grown in importance to enhanced device yield.

Entegris is uniquely positioned to rapidly respond to these challenges and to help our customers solve problems throughout their advanced manufacturing processes. We deliver advanced materials and high-purity chemistries, free from contamination, with optimized packaging and delivery solutions and in-process filtration and purification solutions that ensure high-value liquid chemistries and gases are free from contaminants before reaching the wafer. Our technology portfolio includes approximately 21,000 standard and customized products and solutions to achieve the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity.

Our business is organized and operated in three operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products and technical know-how, they share a global generalist sales force, common business systems and processes, technology centers, and strategic and technology roadmaps. We leverage our expertise from these three segments to create new and increasingly integrated solutions for our customers.

PROPOSED MERGER

On January 27, 2019, we entered into a definitive Agreement and Plan of Merger (“Merger Agreement”) with Versum Materials, Inc., a Delaware corporation (“Versum”), a leading specialty materials supplier to the semiconductor industry. Pursuant to and subject to the terms and conditions of the Merger Agreement, upon completion of the transaction, Versum will merge with and into Entegris (the “Proposed Merger”), with Entegris surviving and continuing as the surviving corporation, and retaining its name and headquarters. At the effective time of the Proposed Merger, each outstanding share of common stock of Versum (with certain exceptions set forth in the Merger Agreement) will be converted into the right to receive 1.120 shares of common stock of Entegris. The transaction is subject to certain conditions, including a majority of the outstanding shares of common stock of both Entegris and Versum approving the Merger Agreement and the receipt of approvals under U.S. and certain foreign antitrust and competition laws. We have agreed to operate our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Proposed Merger, subject to specific exceptions set forth in the Merger Agreement, and have agreed to certain other customary restrictions on operations, as set forth in the Merger Agreement.

The manufacture of semiconductors requires hundreds of highly complex and sensitive manufacturing steps, during which a variety of materials are repeatedly applied to a silicon wafer to build integrated circuits on the wafer surface. We serve the semiconductor ecosystem by providing specialty materials and chemicals utilized in many process steps, offering a broad range of products to monitor, protect, transport, and deliver these critical process materials during the manufacturing process and providing systems to purify liquid chemistry and gases throughout the manufacturing process. The areas of the semiconductor ecosystem that rely most heavily on our products and solutions are described below.

Deposition. Deposition processes include physical vapor deposition (PVD), where a thin film is deposited on a wafer surface in a low-pressure gas environment, chemical vapor deposition (CVD), where a thin film is deposited on a wafer surface by exposing it to one or more volatile precursors which react with the wafer surface, atomic-layer deposition (ALD), where a thin film is deposited on a wafer surface by exposing it to one or more precursors which react through a series of sequential, self-limiting reactions, and electro-plating, where a metal layer, such as copper, is deposited using chemical baths. Our advanced precursor materials and electro-plating chemicals are utilized to meet the semiconductor industry’s composition, uniformity and thickness needs of deposited films. Our filtration and purification products are used to remove contaminants during the deposition process, consequently reducing defects on wafers. These products are critical to ensuring device performance and the manufacturing yields of semiconductor manufacturers.

Chemical Mechanical Planarization (CMP). CMP is a polishing process used by semiconductor manufacturers to planarize, or flatten, many of the layers of material that have been deposited upon silicon wafers. We offer a broad range of products used by semiconductor manufacturers during and immediately following the CMP process. Our formulated cleaning chemistries remove residue from wafer surfaces after the CMP process, and prevent subsequent corrosion. Our filtration and purification systems are used to filter liquid slurries and cleaning chemistries in order to remove select particles and contaminants that can cause defects on a wafer’s surface. Our roller brushes are used in conjunction with our cleans chemistries to clean the wafer after completion of the CMP process in order to prepare the wafer for subsequent operations and our pad conditioners are used to prepare the surface of the CMP polishing pad prior to every polishing cycle.

Photolithography. Photolithography is a process repeated many times throughout the semiconductor manufacturing process that uses light to print complex circuit patterns onto the wafer. To print the projected optical pattern, the wafer is coated with a thin film of light-sensitive material, called photoresist. Light is projected to expose the photoresist, which is then developed (somewhat like photographic film) to create a stenciled image pattern. Our liquid filtration and liquid packaging and dispense systems play a vital role in assuring the pure, accurate and uniform dispense of photoresists onto the wafer so that manufacturers can achieve acceptable yields in the manufacturing process, and our gas microcontamination control systems eliminate airborne contaminants that can disrupt effective photolithography processes.

Etch and Resist Strip. During the etch process, specific areas of the thin film that have been deposited on the surface of a wafer are removed to leave a desired circuit pattern. After the etch process, the hardened resist needs to be completely removed. Our formulated chemical solutions remove photo resists and post-etch residues and our gas filters and purifiers help assure the purity of the process gas streams used in the etch process. Our precision-engineered coatings provide barriers to corrosive chemistries in the etch environment, protect surfaces from erosion and minimize particle generation.

Ion Implant. Ion implantation is a key technology for forming transistors and is used many times during semiconductor fabrication. During ion implantation, wafers are bombarded by a beam of electrically-charged ions, called dopants, which change the electrical properties of the exposed surface films. Our Safe Delivery Source® (SDS®) and VAC® (Vacuum Actuated Cylinders) gas delivery systems assure the safe, effective and efficient delivery of the toxic gases necessary for the implant process. In addition, our proprietary low temperature plasma coating processes for core components are critical elements of ion implantation equipment.

Wet Cleaning. Ultra-high purity chemicals of precise composition are used to clean the wafers before and after several of the processes described above, to pattern circuit images and to remove photoresists after etch. The cleaning chemicals must be maintained at very high purity levels without the presence of foreign material such as particles, ions or organic contaminants in order to maintain manufacturing yields and avoid defective products. Our proprietary formulated cleaning chemistries are used in these wet cleaning processes and our liquid filters and purifiers ensure the purity of these chemicals.

Wafer Solutions. Our wafer and reticle carriers are high-purity “micro-environments” that carry wafers between manufacturing process steps. These products protect wafers from damage or abrasion and minimize contamination during transportation and automated processing. Front-end wafer processing can involve hundreds of steps and take several weeks. Protection of the processed wafer is essential, as a batch of fully processed 200 mm or 300 mm wafers transported in one of our products can be worth over a million dollars.

Other Markets. Many of the processes used to manufacture semiconductors are also used to manufacture photovoltaic cells, LEDs, flat panel displays and magnetic storage devices resulting in the need for similar filtration, purification, control and measurement capabilities. We seek to leverage our products, technologies and expertise to address these important market opportunities.

INDUSTRY TRENDS

Emerging Applications. The market for semiconductors has grown significantly over the past few decades and we expect this trend to continue. We believe that the smartphone, Internet of Things and emerging applications in cloud computing, machine learning and artificial intelligence, autonomous vehicles, and virtual reality will drive growth in the demand for semiconductors, drive wafer starts and create significant opportunities for our products. Existing applications in data processing, wireless communications, broadband infrastructure, personal computers, handheld electronic devices and other consumer electronics, are also expected to drive demand for semiconductors, and in turn, our products.

Manufacturing Complexity and Architecture. The emerging applications described above require more powerful, faster and more energy efficient semiconductors. Semiconductor architectures are changing, with transistor design increasing in complexity, the use of multilayered patterning, vertical structures such as FinFET and 3D-NAND, and shrinking dimensions. These advanced architectures require an increase in the number of process steps required to manufacture these semiconductors. We believe that demand for our materials and consumable products will be driven by the increase in process steps and the associated lithography, deposition, CMP, and etch and clean required to manufacture leading edge semiconductors. Additionally, new materials have played a significant role in enabling improved devices performance and we expect this trend to continue. As dimensions get smaller, new materials will be required for transistor connectivity. For example, leading edge semiconductor manufacturers are moving towards atomic layer scale, where the precision of the manufacturing process and purity of the materials is extremely important to maintain the device integrity. These materials need to be supplied and delivered at ever-increasing levels of purity and control, from point-of-production to point-of-use and dispense on the wafer. We expect the trend for new materials supplied at high levels of purity to drive the demand for our advanced materials and our products and solutions designed to purify, monitor, protect, transport, and deliver critical materials. To address the challenges of the advanced technology nodes, we collaborate with our customers to develop new materials, to enhance our filtration and purification capabilities and to introduce advanced materials packaging and monitoring capabilities.

Material Handling Solutions. Our semiconductor customers have become increasingly focused on materials handling solutions that enable them to safely store, handle, process and transport critical materials throughout the manufacturing process to minimize the potential for damage or degradation to their materials and to protect their investment in processed wafers. We believe that these trends provide opportunities for us to utilize our unique breadth of capabilities to provide innovative materials, materials management, purification, wafer transport, and process solutions to semiconductor customers to enable them to successfully manage this growing complexity.

Reliance on Trusted Suppliers. Our customers require that their key materials suppliers demonstrate greater capabilities, such as sustainability, scalability, flexible manufacturing, quality control, supply chain management, and the ability to effectively collaborate on solutions to problems. We have responded to these demands by deploying resources to enable us to align with their requirements and drive operational excellence. For example, in 2016 and 2017, we expanded our technology centers in South Korea and Taiwan and we are currently building a technology center in Shanghai, China, adding to our research and development capabilities to enhance local development and collaboration and to strengthen relationships with our key customers. We believe these trends will allow us to leverage our manufacturing, operational and technical capabilities, along with our broad technology portfolio, to become an increasingly important strategic supplier to our customers.

Continued Consolidation. Our customer base within the semiconductor industry has consolidated through mergers and acquisitions. As a result, the importance of maintaining and developing strong and close relationships with our customers becomes even more essential. While continuing to strengthen these relationships, we also seek to further broaden our customer base by leveraging our products, technologies and expertise in serving semiconductor applications to address adjacent market opportunities, including in manufacturing processes for flat panel displays, high-purity chemicals, solar cells, optical magnetic storage devices and products for life sciences.

Manufacturing in China. An additional factor that could spur future industry growth is sustained semiconductor industry development in China, which has experienced recent growth in semiconductor production. Construction on an historic number of fabs has been commenced in recent years, and we expect that heavy investment in the semiconductor sector in China will continue, with more than 10 new fab projects expected to ramp in the next several years by local and multinational companies. As a result, we expect that China will remain one of the fastest growing regions in semiconductor industry. Additionally, existing fabs in China are working to rapidly enhance their capabilities to manufacture the latest generation advanced node products, targeting both leading-edge and mainstream applications. However, as Chinese fabs have been facing difficulty in obtaining the necessary technology and products, we expect some uncertainty on the time of some these fab ramps. Expansion and growth of the semiconductor industry in China could increase the need and demand for our products.

OUR COMPETITIVE STRENGTHS

Technology Leadership. We are committed to being able to provide our customers with innovative solutions for their manufacturing needs. For example, we have introduced sub-10 nanometer and 7 nanometer filtration products, advanced deposition materials for next generation transistor and interconnect technologies, advanced reticle pods for extreme ultra-violet, or EUV, photolithography applications, advanced 300 mm wafer carriers and advanced coatings to meet the rigorous demands of the advanced technology nodes faced by our customers. As described in further detail below in “Engineering, Research and Development”, this commitment to technology leadership is demonstrated by our ER&D expenditures in 2018, 2017 and 2016 of $118.5 million, $107.0 million and $107.0 million, respectively.

Comprehensive and Diverse Product Offerings. As semiconductor manufacturers are driving towards more advanced technology nodes, our customers are seeking suppliers who can provide a broad range of reliable, flexible and cost-effective products and materials, as well as the technological and application design expertise necessary to enhancing their productivity, quality, and yield. We believe our comprehensive offering of materials and products creates a competitive advantage as it enables us to meet a broad range of customer needs and provide a single source of product offerings for semiconductor device and equipment manufacturers as they seek to consolidate their supplier relationships and pursue advanced technology nodes. Additionally, our broad product and solution portfolio allows us to serve many aspects of the semiconductor manufacturing ecosystem and to create synergies among certain of our products. For example, our microenvironment and fluidics products are utilized when a fab is being built to move wafers and materials throughout the fab, our chemistries and gas products are consumed during operation of the fab, and our contamination control products ensure the purity of chemistries and gases throughout the fab and its supply chain.

Global Presence. We have established a global infrastructure of design, manufacturing, distribution, service and technical support facilities to meet the needs of our global customers. We have, for example, expanded our manufacturing operations and increased our investment in advanced technology centers in Taiwan and South Korea to support our important customers in these regions, established new sales and service offices in China and are currently building a technology center in Shanghai, China to serve a growing semiconductor manufacturing base in that country, and expanded our presence in Singapore to enhance our global and regional management of supply chain and manufacturing processes. We service our customer relationships in Asia, North America, Europe and the Middle East predominantly via direct sales and support personnel and to a lesser extent through selected independent sales representatives and distributors.

Advanced Manufacturing. We have established leading-edge manufacturing plants located in the United States, Malaysia, Japan, South Korea and Taiwan that possess the advanced manufacturing capabilities described under “Manufacturing” below.

Strong Relationships with Broad Customer Base. We have strong relationships with our customers, which include leading semiconductor manufacturers, original equipment manufacturers, or OEMs, and semiconductor materials suppliers. These relationships provide us with significant collaboration opportunities at the product design stage, which facilitate our ability to introduce new products and applications. For example, we work with our key customers in the development of advanced manufacturing processes to identify and respond to their requests for current and future generations of products for emerging applications requiring cleaner materials, as well as systems that maintain the integrity and stability of materials during transport through the manufacturing process. We believe that our customer base will continue to be an important source of new product development opportunities. Due to the specialized nature of our products, manufacturing complexity, qualification requirements in customers’ fabrication processes, high customer re-formulation and qualification change costs, and extensive proprietary products, we believe our supply position with our customers is strong.

Strong Financial Performance and Cash Flow Generation. We have a strong financial profile with net income of $240.8 million, operating margin of 18.9% and Adjusted EBITDA margin of 28.1% for the fiscal year ended December 31, 2018. In addition to servicing our debt obligations and effecting our capital allocation strategy, we expect that our financial profile will allow us to invest in the research and development and advanced manufacturing capabilities necessary to maintain and expand our technology leadership and to drive organic growth. Additionally, as we have done in the past, we expect that our cash flow generation will enable us to grow inorganically through smaller acquisitions of product lines or technology that expand upon

our product portfolio or through larger acquisitions where we act as a consolidator in the industry and increase our scale and strengthen our position as a leading supplier to our customers. For an explanation of Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation to GAAP net income, see “Non-GAAP Information” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report on Form 10-K.

OUR BUSINESS STRATEGY

We intend to build upon our position as a leading worldwide developer, manufacturer and supplier of advanced specialty materials, filtration and purification solutions, delivery systems, and materials packaging solutions to expand our core business and to grow in other high value-added manufacturing process markets. Our strategy includes the following key elements:

Commitment to Technology Leadership. We continuously improve our products and develop new products as our customers’ needs evolve. As semiconductor devices become smaller and more powerful, and new materials and processes are deployed to produce them, we seek to expand our technological capabilities by developing advanced products that address the requirements for greater purification, protection and transport of high value-added materials and by developing advanced chemical materials for use in critical fabrication processes.

Leveraging our Expertise. We leverage our broad expertise across our portfolio of advanced materials, materials handling and purification capabilities to create innovative new solutions to address unmet customer needs. For example, our industry-leading post-CMP cleaning chemistry is developed and manufactured by our SCEM segment, with collaboration from our MC segment, packaged with our ultra clean container and connector system made by our AMH segment, and delivered to the process tools through fluid handling systems also made by our AMH segment. Furthermore, in the process tool, these chemistries may go through one or several purification systems made by our MC segment to eliminate particles and contaminants. Another example of the results of this strategy is our advanced deposition materials business, where we leverage our ability to synthesize unique molecules, our knowledge of how to purify these materials, and our capability to safely transport these materials and deliver them onto the wafer at the highest throughput. We seek to utilize our diverse and unique expertise in areas of increasing importance to semiconductor manufacturers, such as developing advanced materials and ensuring the purity of high-value materials, and our ability to work collaboratively across our three segments, which enables us to quickly and effectively develop optimized and complimentary solutions for our customers.

Operational Excellence. Our strategy is to continue to develop our advanced manufacturing capabilities into a competitive advantage with our customers by focusing on the following priorities:

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use of manufacturing equipment and facilities incorporating leading-edge technology including advanced cleanroom and cleaning procedures;

implementation of automated quality systems that provide both process monitoring and process control throughout the manufacturing process as well as predictive quality data to mitigate against potential quality excursions;

conduct of manufacturing operations to assure the safety of our employees and of the individuals using our products; and

•

maintaining an agile manufacturing organization that is capable of rapid design and development of prototypes of new and derivative products, as well as promptly responding to customer feedback concerning prototypes so that we quickly commercialize and ramp production acceptable to our customers.

Continued Focus on Customers. We view the strong relationships we have with our customers, which include leading semiconductor manufacturers, OEMs, and semiconductor materials suppliers, as critical to our long term success. We intend to reinforce and further strengthen these relationships, through, among other things, collaborations and joint development. Customer intimacy enables us to respond rapidly and thoroughly to their manufacturing challenges and enables us to bring forth new products that serve an existing need.

Adjacent Markets. We leverage our expertise in the semiconductor industry by developing products for other industries that employ similar technologies and production processes and that utilize materials integrity management, high-purity fluids and integrated dispense systems. For example, outside of the semiconductor industry, our products are used in manufacturing processes for flat panel displays, high-purity chemicals, solar cells, optical magnetic storage devices and products for life sciences. We plan to continue to identify and develop products that address needs in adjacent markets. We believe that by utilizing our technology to provide manufacturing solutions across multiple industries, we are able to increase the total available market for our products and reduce, to an extent, our exposure to the cyclicality of the semiconductor industry.

Strategic Acquisitions, Partnerships and Related Transactions. We will continue to pursue strategic acquisitions and business partnerships that enable us to address gaps in our product offerings, secure new customers, diversify into complementary product markets, broaden our technological capabilities and product offerings, access local or regional markets and achieve benefits of increased scale. For example, in June 2018, we acquired from SAES Getters S.p.A. the SAES Pure Gas business, a leading provider of high-capacity gas purification systems used in semiconductor manufacturing and adjacent markets, which now reports into our Microcontamination Control division, enabling us to offer a complete portfolio of gas purifications solutions for both bulk and specialty gases to our customers. In January 2018, we acquired Particle Sizing Systems, LLC, a company focused on particle sizing instrumentation for liquid applications in both semiconductor and life science industries, which enables customers to perform particle size analysis online and in real time, directly in fluid stream process, preventing costly yield excursions. In April 2017, we acquired the water and chemical filtration product line for microelectronics applications from W. L. Gore & Associates, Inc., or Gore, where we acquired a synergistic product line that leverages our existing platform and expands our served markets. Our 2014 acquisition of ATMI, Inc., or ATMI, brought a whole new portfolio of technologies and materials products to serve our semiconductor customers. Further, as the dynamics of the markets that we serve shift, we will reevaluate our existing businesses and in the event that we conclude that a business is not able to provide value-added solutions to its markets in a manner that contributes to achieving our financial objectives, we expect to restructure or replace that business, such as the sale of our small cleaning business in France. Finally, we are continuously evaluating opportunities for strategic alliances, such as our strategic alliance with Enthone, joint development programs and collaborative marketing efforts with key customers and other industry leaders. For example, in connection with our strategic commitment to support the growing semiconductor and related microelectronics industries in China, in 2017, we entered into agreements with local partners to expand our capability to manufacture our specialty chemical and deposition products locally and shorten our supply chain for our customers in China.

OUR SEGMENTS

As discussed, our business is organized and operated in three operating segments which align with the key elements of the advanced semiconductor manufacturing ecosystem: Specialty Chemicals and Engineered Materials, or SCEM; Microcontamination Control, or MC; and Advanced Materials Handling, or AMH. We leverage our expertise from these three segments to create new and increasingly integrated solutions for our customers. The following is a detailed description of our three segments:

SPECIALTY CHEMICALS AND ENGINEERED MATERIALS SEGMENT

The SCEM segment provides high-performance and high-purity process chemistries, gases, and materials that enable enhanced device performance. These materials are utilized in critical semiconductor manufacturing processes such as deposition, cleaning, and integration of complex materials. Advanced materials, delivered at high purity, are critical to enabling the performance of leading-edge logic and memory applications. We believe the growing demand in the 3D-NAND market, challenges with metallization schemes and the need for specialized cleaning solutions will drive consumption for materials in our SCEM segment. In conjunction with products from our MC and AMH segments, the materials in our SCEM segment provide unique solutions to safely and efficiently deliver critical materials to support semiconductor and other advanced manufacturing processes.

Specialty Gas Products. Our specialty gas solutions provide advanced safety and process capabilities to semiconductor, display and solar panel manufacturers. Our SDS cylinders store and deliver hazardous gases, such as arsine, phosphine, germanium tetrafluoride and boron trifluoride, at sub-atmospheric pressure through the use of our proprietary carbon-based adsorbent materials. These products minimize potential leaks during transportation and use and allow more gas to be stored in the cylinder, features which provide significant safety, environmental and productivity benefits over traditional high-pressure cylinders. New generations of SDS products further increase the gas storage capacity, reducing tool down time, therefore, resulting in significant cost savings for our customers. We also offer VAC, a complementary technology to SDS, where select implant gases and gas mixtures are stored under high pressure but delivered sub-atmospherically.

Advanced Deposition Materials Products. Our advanced deposition materials include advanced liquid, gaseous and solid precursors which are incorporated in chemical vapor deposition (CVD) and atomic layer deposition (ALD) processes by the semiconductor industry, including organometallic precursors for the deposition of tungsten, titanium, cobalt and aluminum containing films and organosilane precursors for the deposition of silicon oxide and silicon nitride films. These precursors are designed in close collaboration with OEM process tool manufacturers as well as device makers to produce application specific solutions that are compatible with complex integrations of material solutions used to build the semiconductor device. We offer containers that allow for reliable storage and delivery of low volatility solid and liquid precursors required in ALD processes. When combined with our proprietary corrosion resistant coatings and filtration solutions from our MC segment, our advanced deposition materials enable the industry’s highest purity levels, resulting in improved device performance.

Surface Preparation and Integration Products. We offer a range of materials used to prepare the surface of a semiconductor wafer during the manufacturing process and to integrate with materials being used on the wafer. We also provide advanced plating solutions, such as our Viaform® product (a trademark of and exclusively licensed from Enthone Inc., or Enthone, a subsidiary of Platform Specialty Products Corporation), which includes inorganic and proprietary organic molecules that provide the wiring for copper interconnects. We also offer CMP cleaning solutions for applications such as semiconductor post-etch residue removal, wafer etching, organics removal, negative resist removal, edge bead removal, and corrosion prevention. Our wet chemistries solutions, combined with filtration solutions from our MC segment and fluid handling solutions from our AMH segment, provide enhanced purity, which results in improvements in our customers’ processes. Our consumable PVA roller brush products are used to clean the wafer following the CMP process and our pad conditioners, based on our silicon carbide capabilities, lengthen CMP pad life.

MICROCONTAMINATION CONTROL SEGMENT

The MC segment offers solutions to purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The design and performance of our liquid and gas filtration and purification products are important to the semiconductor manufacturing process because they remove contamination and directly reduce defects and improve manufacturing yield. Our proprietary filters remove organic and inorganic nanometer-sized contaminants from the different fluids and gases used in the manufacturing process, including photolithography, deposition, planarization and surface etching and cleaning. As our customers leverage leading edge lithography tools and multi-patterning technology to enable each subsequent generation of products, our filtration and purification products are utilized to achieve necessary levels of purity and contamination control. We believe demand for purification and filtration products is being driven by the continuous node shrink in logic semiconductors and the ramp in the 3D-NAND market, as the risk of yield loss grows with the incremental manufacturing steps needed for the production of these devices. We utilize expertise from the AMH segment in polymer science and from the SCEM segment in chemical manufacturing to develop differentiated filtration and purification solutions for our customers.

Liquid Microcontamination Control Products. We offer a variety of unique products that are optimized to control contaminants in our customers’ liquid processes. For example, our Torrento® series of filters is used for the filtration of aggressive acid and base chemistries for both semiconductor fabs as well as specialty chemical manufacturers including our SCEM segment. Manufacturers of high purity chemicals as well as semiconductor fabs use our Trinzik® products for the filtration of chemicals as well as ultra-pure water. Our Impact® series of filters are used in point-of-use photochemical dispense applications, including those provided by our AMH segment, where the delivery of superior flow rate performance and reduced microbubble formation is critical.

Gas Microcontamination Control Products. We offer a complete portfolio of products designed to remove particulate and molecular contaminates from gas streams from the point of creation on the gas pads to the point of use at the wafer in semiconductor, flat panel display and LED fabs. In addition, we provide products used to eliminate airborne molecular contamination from critical process tool areas or cleanrooms in the fab. Our Waferguard® gas filters reduce outgassing and remove particle contamination. Our GateKeeper® gas purifiers and large facility wide gas purification systems provide continuous purified gas supply to customer fabs by chemically reacting and absorbing contaminants, effectively removing gaseous contaminants down to part-per-trillion levels. Our Chambergard™ gas diffusers provide semiconductor equipment manufacturers with the capability to rapidly vent their tools to atmosphere to dramatically reduce process cycle times without adding particles to the wafers. These products are used in, or alongside, critical processing tools to improve yield and reduce tool downtime. In addition, we provide filters used to eliminate airborne molecular contamination from critical process tool areas or cleanrooms in the fab, improving process yield.

ADVANCED MATERIALS HANDLING SEGMENT

The AMH segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and substrates for a broad set of applications in the semiconductor industry and other high-technology industries. These systems and products improve our customers’ yields by protecting wafers from abrasion, degradation and contamination during

manufacturing and transportation and by assuring the consistent, clean and safe delivery of advanced chemicals from the chemical manufacturer to the point-of-use in the semiconductor fab. As advanced semiconductor fabs are built, demand is driven for our wafer handling and fluid handling products. As those fabs move into production, we see demand for wafer carrying and fluid containment solutions offered by this segment. The AMH segment collaborates closely with the semiconductor chemical manufacturers segment in developing products that are compatible with advanced chemistries to enhance yield, and integrates liquid filtration technology from our MC segment to deliver consistent and pure chemistry.

Wafer Solutions. We lead the market with our high-volume line of Ultrapak® and Crystalpak® products for wafers ranging from 100 to 200 mm, which ensure the clean and secure transport of wafers from the wafer manufacturers to the semiconductor fab. We also offer a front-opening shipping box, or FOSB, for the transportation and automated interface of 300 mm wafers. We lead the market for 300mm front opening unified pods, or FOUPs, wafer transport and process carriers, and standard mechanical interface pods, or SMIF pods, for 200mm wafer applications. These microenvironment products safely and accurately deliver wafers within the semiconductor fab environment to the various process fabrication steps. We are a leader in reticle protection products for photolithography. This includes products that protect the high-value EUV (extreme ultraviolet) lithography masks during both the mask manufacturing process and their use in the semiconductor fab.

Chemical Containers. We have a broad portfolio of flexible and rigid polymer packaging and container products, from low-volume containers to transport high-value photoresist chemistries, such as our NOWPak® products, to large intermediate bulk containers (IBCs) to safely and efficiently transport chemicals in bulk, such as our FluoroPure® products. Our connection systems provide for safe and efficient chemical dispense from the container in the fab. Chemical companies utilize our packaging products to ensure the purity of chemistries shipped to semiconductor fabs, resulting in enhance yields.

Our other high-technology markets include manufacturers and suppliers in the solar and life science industries, electrical discharge machining customers, glass and glass container manufacturers, aerospace manufacturers and manufacturers of biomedical implantation devices.

In 2018, 2017 and 2016, net sales to our top ten customers accounted for 44%, 47% and 45%, respectively, of combined net sales. In 2018, 2017 and 2016, Taiwan Semiconductor Manufacturing Company Limited, accounted for $154 million, $168 million and $162 million of net sales, respectively, or approximately 10%, 13% and 14% of our net sales, respectively, including sales from each of our three reporting segments. In addition, in 2018 and 2017, Samsung Electronics Co. accounted for $164 million and $141 million of net sales, respectively, or approximately 11% and 10% of our net sales, respectively, including sales from all of the Company’s segments, respectively.

International net sales represented 78%, 79% and 78%, respectively, of net sales in 2018, 2017 and 2016. Approximately 3,100 customers purchased products from us during 2018. For the fiscal year ended December 31, 2018, our revenue breakdown by customer segment was as follows: semiconductor manufacturers 46%; OEMs 13%; electronic materials customers 14%; other semiconductor customers 15%; and non-semiconductor customers 12%.

We may enter into supply agreements with our customers. These agreements generally have a term of one to three years, but do not contain any long-term purchase commitments. Instead, we work closely with our customers to develop non-binding forecasts of the future volume of orders. However, customers may cancel their orders, change production quantities from forecasted volumes or delay production for a number of reasons beyond our control.

We sell our products worldwide, primarily through our direct sales force and strategic independent distributors located in all major semiconductor markets. Independent distributors are also used in other semiconductor market territories and for specific market segments. As of December 31, 2018, our sales and marketing force consisted of approximately 560 employees worldwide.

Our unique capabilities and long-standing industry relationships have provided us with the opportunity for significant collaboration with our customers at the product design stage, which has facilitated our ability to introduce new materials and new solutions that meet our customers’ needs. We are constantly identifying for our customers a variety of materials, purification and process control challenges that may be addressed by our product solutions. Our sales representatives provide our customers with worldwide technical support and information about our products and materials.

We believe that our technical support services are important to our sales and marketing efforts. These services include assisting in defining a customer’s needs, evaluating alternative products and materials, designing a specific system to perform the desired operation, training users and assisting customers in compliance with relevant government regulations. Additionally, our field applications engineers, located in all of the major markets we serve, work directly with our customers on product qualification and process improvements in their facilities. We maintain a network of service centers, applications laboratories and technology centers located in all key markets internationally and in the United States to support our products and our customers with their advanced development needs, provide local technical service and ensure fast turnaround time.

COMPETITION

The market for our products is highly competitive. While price is an important factor, we compete primarily on the basis of the following factors:

technical expertise;

breadth of product line;

product quality and performance;

breadth of geographic presence;

advanced manufacturing capabilities;

customer service and support; and

total cost of ownership;

after-sales service.

historical customer relationships;

We believe that we compete favorably with respect to all of the factors listed above. We believe that our key competitive strengths include our broad product line, our strong research and development infrastructure and investment, our manufacturing excellence, our advanced quality control systems, the low total cost of ownership of our products, our ability to provide our customers with quick order fulfillment and our applications expertise in semiconductor manufacturing processes. However, our competitive position varies depending on the market segment and specific product areas within these segments. While we have longstanding relationships with a number of semiconductor and other electronic device manufacturers, we also face significant competition from companies that also have longstanding relationships with other semiconductor and electronic device manufacturers and, as a result, have been able to have their products specified by those customers for use in manufacturers’ fabrication facilities.

The competitive landscape is varied, from multinational companies to small regional or regionally-focused companies. While product quality and technology remain critical, overall, industry trends are indicating a shift to localized, cost-competitive and consolidated supply chains.

Because of the unique breadth of our capabilities, we believe that there are no global competitors that compete with us across the full range of our product offerings. Many of our competitors are local companies that participate in only a few products or in specific geographies. While there are other larger, broad-based materials suppliers, many are concentrated in specific product areas, such as filtration, specialty chemicals or materials handling. Notable competitors with respect to certain specific product areas include Pall Corporation (part of Danaher Corporation), Shin-Etsu Polymer Co., Ltd., Gemu Valves, Inc., Tokyo Keiso Co., Ltd., Mersen, Versum Materials, Inc., E. I. du Pont de Nemours and Company and The Dow Chemical Company (each a subsidiary of DowDupont Inc.), Air Liquide, Praxair, Inc. (a subsidiary of Linde plc.), Donaldson Company, Inc. and Parker Hannifin Corp.

ENGINEERING, RESEARCH AND DEVELOPMENT

We believe that technology is important to the success of our businesses, and we plan to continue to devote significant resources to engineering, research and development (R&D), balancing efforts between shorter-term market needs and longer-term investments. Our aggregate engineering, research and development expenses in 2018, 2017 and 2016 were $118.5 million, $107.0 million and $107.0 million, respectively. As of December 31, 2018, we had approximately 500 employees in engineering, research and development. We have supplemented and may continue to supplement our internal research and development efforts by licensing technology from unaffiliated third parties and/or acquiring rights with respect to products

incorporating externally owned technologies. Our R&D expenses consist of personnel and other direct and indirect costs for internally funded project development, including the use of outside service providers.

We believe we have a rich pipeline of development projects. For example, our engineering, research and development efforts have been focusing on growth opportunities in areas such as bulk photochemical filtration, new boron mixtures for ion implant, new precursors for deposition, specialty coatings for key applications and new cleans chemistries. Our engineering, research and development efforts are directed toward developing and improving our technology platforms for semiconductor and advanced processing applications and identifying and developing products for new applications, often working directly with our customers to address their particular needs.

We have engineering, research and development capabilities in California, Colorado, Connecticut, Massachusetts, Minnesota, Texas, Japan, South Korea, Taiwan, Singapore and Malaysia to meet the global needs of our customers. We use sophisticated methodologies to research, develop and characterize our materials and products. Our capabilities to test and characterize our materials and products are focused on continuously reducing risks and threats to the integrity of the critical materials that our customers use in their manufacturing processes.

We participate in Semiconductor Equipment and Materials International (SEMI®), an association of semiconductor equipment suppliers, as well as collaborate with leading universities and industry consortia, such as the University of California and the Interuniversity Microelectronics Centre (imec®). We undertake this work to extend the reach of our internal R&D and to gain access to leadership ideas and concepts beyond the time horizon of our internal development activities.

PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS

As of December 31, 2018, we own approximately 2,284 active patents worldwide, of which about 644 are United States patents. Additionally, Entegris owns about 1,098 that are pending patent applications globally. In addition, we license certain patents owned by third parties. We rely on a combination of patent, copyright, trademark and trade secret laws and license agreements to establish and protect our proprietary rights. We refresh our intellectual property on an ongoing basis through continued innovation. While we license and will continue to license technology used in the manufacture and distribution of products from third parties, we do not consider any particular patent or license to be material to our business.

We vigorously protect and defend our intellectual property. We require each of our employees, including our executive officers, to enter into standard agreements pursuant to which the employee agrees to keep confidential all of our proprietary information and to assign to us all inventions made while employed by us. We also require all outside scientific collaborators, sponsored researchers, and other advisors and consultants who are provided confidential information to execute confidentiality agreements upon the commencement of the consulting or collaboration relationship in question. These agreements generally provide that all confidential information developed or made known to the entity or individual during the course of the entity’s or individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific limited circumstances.

MANUFACTURING

Our customers rely on our products and materials to assure the integrity of the critical materials used in their manufacturing processes by providing purity, cleanliness, consistent performance, dimensional precision and stability. Our ability to meet our customers’ expectations, combined with our substantial investments in worldwide manufacturing capacity, position us to respond to the increasing demands from our customers for yield-enhancing materials and solutions.

To meet our customers’ needs worldwide, we have established an extensive global manufacturing network with facilities in the United States, Japan, Taiwan, Malaysia and South Korea. Because we work in an industry where contamination control is paramount, we maintain Class 100 to Class 10,000 cleanrooms for manufacturing and assembly. We believe that our worldwide advanced manufacturing capabilities are important competitive advantages. These include:

We have made significant investments in systems and equipment to create innovative products and tool designs, including metrology and 3D printing capabilities for rapid analysis and production prototype of products. In addition, we use contract manufacturers for certain of our gas purification systems and certain electronic materials products both in the U.S. and Asia.

RAW MATERIALS

Our products are made from a wide variety of raw materials that are generally available from multiple sources of supply. However, while we seek to have several sources of supply for all of these materials, certain materials included in our products, such as certain filtration membranes in our MC segment, petroleum coke and specialty and commodity chemicals in our SCEM segment and polymer resins in our AMH segment, are obtained from a single source or a limited group of suppliers or from suppliers in a single country. We have entered into multi-year supply agreements with a number of suppliers for the purchase of raw materials in the interest of supply assurance and to control costs.

GOVERNMENTAL REGULATION

Our operations are subject to federal, state and local regulatory requirements relating to environmental, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of contaminants, hazardous substances and wastes, as well as practices and procedures applicable to the construction and operation of our plants. Although some risk of costs and liabilities related to these matters is inherent in our business, as with many similar businesses, we believe that our business is operated in substantial compliance with applicable regulations. However, new, modified or more stringent requirements or enforcement policies could be adopted, which could adversely affect us. While we expect that capital expenditures will be necessary to assure that any new manufacturing facility is in compliance with environmental and health and safety laws, we do not expect these expenditures to be material.

EMPLOYEES

As of December 31, 2018, we had approximately 4,900 employees. Given the variability of business cycles in the semiconductor industry and the quick response time required by our customers, it is critical that we be able to quickly adjust the size of our production staff to maximize efficiency. Therefore, we use skilled temporary labor as required.

None of our employees are represented by a labor union or covered by a collective bargaining agreement other than statutorily mandated programs in certain European countries.

FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS

For a discussion of revenue and segment profitability with respect to each of our reporting segments, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segment Analysis below, which is incorporated herein by reference. See also note 16 to our consolidated financial statements. Approximately 78%, 79% and 78% of our net sales were made to customers outside North America in 2018, 2017 and 2016, respectively. Industry and geographic segment information is also discussed in note 16 to the Entegris, Inc. consolidated financial statements included in response to Item 8 below, which is incorporated herein by reference.

OUR HISTORY

The Company was incorporated in Delaware on March 17, 2005 in connection with a merger between Entegris, Inc., a Minnesota corporation, and Mykrolis Corporation, a Delaware corporation. On April 30, 2014, the Company acquired ATMI, based in Danbury, CT. Entegris has been helping its customers solve their critical materials challenges and enhance their manufacturing yields for over 50 years, tracing its corporate origins back to Fluoroware, Inc., which began operating in 1966.

AVAILABLE INFORMATION

Our Internet address is www.entegris.com. On this web site, under the “Investors-Financial Information-SEC Filings” section, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC): our annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; our proxy statements; any amendments to those reports or statements, and Form SD. All such filings are available on our web site free of charge. The SEC also maintains a web site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on our website, and any other website, as referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

Item 1A. Risk Factors.

In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating us and our common stock. Any of the following risks, many of which are beyond our control, could

materially and adversely affect our financial condition, results of operations or cash flows, or cause our actual results to differ materially from those projected in any forward-looking statements. While we believe that the following list identifies our most significant risk factors, there may be additional risks and uncertainties that are not presently known, are not currently believed to be material, or are not identified below because they are common to all businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. For more information, see “Cautionary Statement” in Item 7 of this Annual Report on Form 10-K.

Risks Related to Our Business and Industry

WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS MAY CAUSE DEMAND FOR OUR PRODUCTS TO DECREASE AND MAY ADVERSELY AFFECT OUR BUSINESS.

Worldwide economic and industry conditions may adversely affect our business. Our revenue is primarily dependent upon demand from semiconductor manufacturers, which is largely driven by the current and anticipated business and consumer demand for electronic products that utilize semiconductors. Despite the broadening of semiconductor demand drivers to including applications such as smartphones, cloud computing, the Internet of Things, and artificial intelligence, amongst others, the semiconductor industry has historically been, and may in the future be, highly cyclical with periodic significant downturns, resulting in significantly decreased expenditures by semiconductor manufacturers. We are unable to predict the ultimate duration or severity of any future downturns for the semiconductor industry. We have in the past experienced significant revenue deterioration and operating losses due to a severe downturn in the semiconductor industry. During downturns, our revenue is reduced and there is likely to be an increase in pricing pressure and shifts in product and customer mix, all of which may affect gross margin and net income. Additionally, the semiconductor industry is affected by seasonal shifts in demand. Even moderate cyclicality or seasonality can cause our operating results to fluctuate significantly from one period to the next.

Uncertain and volatile economic conditions and other factors can exacerbate negative trends in business and consumer spending, causing our customers to push out, cancel, or refrain from purchasing our products and solutions, which may have an adverse impact on our revenues, results of operations and financial condition. Changes in order patterns have an immediate impact on our revenues because we typically do not have significant backlog. Uncertain economic and industry conditions make it more challenging for us to forecast our operating results, make business decisions, and identify and prioritize business risks. If we do not appropriately respond to changing economic and industry conditions, it could have a significant negative impact on its business performance and financial condition. We may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect our ability to capitalize on opportunities. Furthermore, since we must continue to maintain a satisfactory level of engineering, research and development expenditures, continue to invest in our infrastructure and maintain the ability to respond to any significant increases in demand, if they occur, lower sales volume in periods of reduced demand can have a large impact on our profitability.

OUR DEPENDENCE ON SINGLE AND LIMITED SOURCE SUPPLIERS OR AN INTERRUPTION IN OUR ORDINARY SOURCES OF SUPPLY COULD AFFECT OUR ABILITY TO MANUFACTURE OUR PRODUCTS AND HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

We rely on single or limited source suppliers for raw materials, such as plastic polymers, filtration membranes, petroleum coke and other materials, which are critical to the manufacturing of our products. If we lost one of these sources, it may be difficult for us to find an alternative supplier and we would need to qualify this new source through our customers’ rigorous qualification processes. Although we seek to reduce dependence on these sole and limited source suppliers, the partial or complete loss of these sources could interrupt our manufacturing operations and result in an adverse effect on our results of operations.

At times, we have experienced a limited supply of certain raw materials and have had to substitute raw materials, which have resulted in delays, increased costs and risks associated with qualifying products made from such new raw materials with our customers. Events such as an industry-wide increase in demand for, or the discontinuation of, raw materials used in our products could affect our ability to acquire sufficient quantities and our manufacturing operations may be interrupted. For example, global demand for fluoropolymers increased unexpectedly in 2017 due to greater requirements from certain markets. While we were able to maintain our supply of this raw material and prevent delays in customer shipments by holding forecast reviews with our key suppliers and securing higher levels of fluoropolymers inventory, future raw materials shortages may adversely affect our operations. Additionally, our suppliers may not have the capacity to meet increases in our demand for raw materials, in turn, making it difficult for us to meet demand from our customers. Furthermore, prices for our raw materials can vary widely. While we have long-term arrangements with certain key suppliers that fix our price for the purchase of certain raw materials, if the cost of our raw materials increases and we are unable to correspondingly increase the sales price of our products or find other cost savings, our profit margins will decline.

WE ARE EXPOSED TO THE RISKS OF OPERATING A GLOBAL BUSINESS AS A SIGNIFICANT AMOUNT OF OUR SALES AND MANUFACTURING ACTIVITY OCCUR OUTSIDE THE UNITED STATES.

Sales to customers outside the United States accounted for approximately 78%, 79% and 78% of our net sales in 2018, 2017 and 2016, respectively. We anticipate that international sales will continue to account for a majority of our net sales. In addition, a number of our key domestic customers derive a significant portion of their revenues from sales in international markets. We also manufacture a significant portion of our products outside the United States and are dependent on international suppliers for many of our parts and raw materials. We intend to continue to pursue opportunities in both sales and manufacturing internationally. Our international operations are subject to a number of risks and potential costs that could adversely affect our revenue and profitability, including:

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unanticipated government actions, laws, rules, regulations and policies, such as “trade wars” or changes in international trade requirements and sanctions and/or tariffs that affect our business and that of our customers and suppliers, that could impose additional costs on our operations, or that could limit our ability to operate our business;

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challenges in hiring and integrating workers in different countries;

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management of a diverse workforce with different experience levels, languages, cultures, customs, business practices and worker expectations, along with differing employment practices and labor issues;

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maintenance of appropriate business processes, procedures and internal controls, and compliance with legal, environmental, health and safety, anti-corruption and other regulatory requirements;

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development of relationships with local customers, suppliers and governments;

expense and complexity of complying with U.S. and foreign import and export regulations, including the ability to obtain required import and export licenses;

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fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar against foreign currency including Japanese yen, euro, Taiwanese dollar, Korean won, Chinese yuan or Singapore dollar, which could cause our sales and profitability to decline;

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liability for foreign taxes assessed at rates higher than those applicable to our domestic operations;

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customer or government efforts to encourage operations and sourcing in a particular country, such as Korea and China or that favor domestic companies over nondomestic companies, including efforts to provide for the development and growth of local competitors; and

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political and economic instability and uncertainty.

In the past, we have incurred costs or experienced disruptions due to the factors described above and we expect to do so in the future. For example, effective October 30, 2018, the U.S. Department of Commerce restricted exports to a Chinese semiconductor manufacturing company and may in the future impose further restrictions on this or other semiconductor manufacturers or industry participants. While this particular event is not expected to have an adverse effect on our revenue, other restrictions could impact our ability to serve customers in China and in other countries. In addition, the import of gas canisters and chemicals viewed as dangerous have come under increased regulatory scrutiny by governmental officials in China. As a result, we have established partnerships with local suppliers. However, this increased regulation may impair the ability of our SCEM segment to import those products into China and may cause us to lose sales. Also, in the past, our operations in Asia, and particularly South Korea, Taiwan and Japan, have been negatively impacted as a result of regional economic instability. There have historically been strained relations between China and Taiwan and there are continuing tensions between North Korea and other countries, including South Korea and the United States. Any adverse developments in those relations could significantly disrupt the worldwide production of semiconductors, which may lead to reduced sales of our products.

A SIGNIFICANT AMOUNT OF OUR SALES IS CONCENTRATED ON A LIMITED NUMBER OF KEY CUSTOMERS AND, THEREFORE, OUR NET SALES AND PROFITABILITY MAY MATERIALLY DECLINE IF WE LOST ONE OR MORE OF THESE CUSTOMERS.

Sales to a limited number of large customers constitute a significant portion of our overall revenue, shipments, cash flows, collections, and profitability. Our top ten customers accounted for 44%, 47% and 45% of our net sales in 2018, 2017 and 2016, respectively. Our customers could stop using our products in their manufacturing processes with limited advance notice to us and suffer little or no penalty for doing so. The cancellation, reduction or deferral of purchases of our products by even a single customer could significantly reduce our revenues in any particular quarter. If we were to lose any of our significant customers, if our products are not specified for these customers’ products or production processes, or if we suffer a material reduction in their purchase orders, our revenue could decline and our business, financial condition and results of operations could be materially and adversely affected. Due to the long design and development cycle and lengthy customer product qualification periods required for most of our new products, we may be unable to quickly replace these customers, if at all.

Furthermore, the semiconductor industry has been undergoing, and is expected to continue to undergo, consolidation. If any of our customers merge or are acquired, we may experience lower overall sales from the merged or surviving companies. In addition, our principal customers also hold considerable purchasing power and may be able to negotiate requirements that result in decreased pricing, increased costs, and/or lower margins for us, and limitations on our ability to share jointly developed technology with others.

We could also lose our key customers or significant sales to our key customers because of factors beyond our control, such as a significant disruption in our customers’ businesses generally or in a specific product line, a change in the manufacturing sourcing policies or practices of these customers or the timing of customer inventory adjustments. For example, our customers’ aggressive management of inventory has adversely affected revenue in our SCEM segment in the past and may adversely affect future results of operations.

IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE BY CONTINUING TO INNOVATE AND INTRODUCE NEW AND ENHANCED PRODUCTS AND SOLUTIONS, OUR BUSINESS COULD BE SERIOUSLY HARMED.

The semiconductor industry is subject to rapid technological change, changing customer requirements and frequent new product introductions. As a result, the life cycle of our products is difficult to determine. We believe that our future success will depend upon our ability to continue to develop mission-critical solutions to maximize our customers’ manufacturing yields and enable higher performance of end-market materials or devices. This requires that we successfully anticipate and respond to technological changes in manufacturing processes in a cost-effective and timely manner. A failure to develop new products or enhancements to our existing products or the inability to timely manufacture and ship these products or enhancements in sufficient volume could harm our business prospects and significantly reduce our sales. In addition, if new products have reliability or quality problems, we may experience reduced orders, higher manufacturing costs, delays in acceptance and payment, additional service and warranty expense, and damage to our reputation.

COMPETITION FROM NEW OR EXISTING COMPANIES COULD HARM OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW.

We operate in a highly competitive industry. Our competitors include many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research and development, and marketing resources than we do. In addition, some of our competitors may have better-established customer relationships than we do, which may enable them to have their products specified for use more frequently and more quickly by these customers. We also face competition from smaller, regional companies, which focus on serving those customers in their same region. Another source of competition is from the manufacturing engineering teams of our customers, who continually evaluate the benefits of internal manufacturing versus outsourcing. If we are unable to maintain our competitive position, we could experience downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities and a loss of market share, which could have a material adverse effect on our results of operations. Further, we expect that existing and new competitors will improve the design of their existing products and will introduce new products with enhanced performance characteristics. The introduction of new products or more efficient production of existing products by our competitors could diminish our market share and increase pricing pressure on our products.

IF OUR NEW PRODUCT INITIATIVES AND RELATED INVESTMENTS DO NOT RESULT IN FUTURE BUSINESS OPPORTUNITIES, OUR REVENUE AND PROFITABILITY MAY DECLINE.

In the semiconductor market, while the development period for a product can be very long, the first company to introduce an innovative product meeting an identified customer need will often have a significant advantage over offerings of competitive products. For this reason, we may make significant cash expenditures to research, develop, engineer and market new products and make significant capital investments in technology and manufacturing capacity in advance of future business developing and without any purchase commitment from our customers. For example, to support new product and technology development, we incurred $118.5 million, $107.0 million and $107.0 million for engineering, research and development expense in 2018, 2017 and 2016, respectively.

Following development, it may take a number of years for sales of a new product to reach a substantial level, if ever. A product concept may never progress beyond the development stage or may only achieve limited acceptance in the marketplace. If this occurs, we do not receive a direct return on our expenditures, we may not realize any indirect benefits, we may lose market share and our revenue and profitability may decline. For example, from 2011 to 2014, our capital expenditures relating to developing the capability to manufacture shippers and FOUPs for 450 mm wafers were approximately $16.5 million. However, major semiconductor manufacturers have announced that they would not initiate 450 mm manufacturing in the foreseeable future. As a result, we incurred significant impairment charges in fiscal year 2017. We cannot assure you that the new products and technology we choose to develop and market in the ordinary course of our business will be successful.

TARIFFS, TRADE RESTRICTIONS AND PROTECTIONIST MEASURES RESULTING FROM INTERNATIONAL TRADE DISPUTES COULD HAVE AN ADVERSE IMPACT ON OUR OPERATIONS.

We have significant sales to customers outside of the United States and we purchase a significant amount of raw materials from suppliers outside of the United States. The United States and other countries have levied tariffs and taxes on certain goods. While there is uncertainty as to the duration of these tariffs and scope of future tariffs, tariffs may increase the costs of certain raw materials that we import into the United States and may negatively impact our margins as we may not be able to increase the prices of our products. Retaliatory tariffs on goods manufactured in the United Stated could make the products we sell from the United States more expensive to customers outside the United States, reducing the competitiveness of our products, harming sales and inhibiting our ability to do business in these foreign countries. As a result of these ongoing trade disputes, our business, financial condition, results of operations and cash flow could be negatively impacted.

WE MAY ACQUIRE OTHER BUSINESSES, FORM JOINT VENTURES OR DIVEST BUSINESSES, WHICH COULD NEGATIVELY AFFECT OUR FINANCIAL PERFORMANCE.

As part of our business strategy, and as we have done in the past, we expect to address gaps in our product offerings, adjust our portfolio of businesses to meet our ongoing strategic objectives, diversify into complementary markets and increase our scale through acquisitions, joint ventures or other types of collaborations, including the Proposed Merger. As a result, we may enter markets in which we have no or limited prior experience and may encounter difficulties in divesting businesses that no longer meet our objectives. Competition for acquiring attractive businesses in our industry is substantial. We may experience difficulty in identifying suitable acquisition candidates or in completing selected transactions at appropriate valuations, in a timely manner, on a cost-effective basis or at all, and we may not realize the anticipated benefits of any such transaction. In addition, new legislation or regulations may increase the difficulty or impair our ability to invest or consummate transactions in certain countries or require us to obtain regulatory approvals to do so. Specifically, the Proposed Merger is subject to a number of closing conditions, many of which are outside of our control, including the receipt of approvals from our and Versum’s shareholders, the receipt of approvals under U.S. and certain foreign antitrust and competition laws, and other conditions set forth in the Merger Agreement, and there can be no assurance that the Proposed Merger will be completed.

Alternatively, we may be required to undertake multiple transactions at the same time in order to take advantage of acquisition opportunities that do arise. This could strain our ability to effectively execute and integrate these transactions. In addition, the integration of certain operations following a transaction, including the Proposed Merger, requires the dedication of significant management resources, which may temporarily distract management’s attention from our day-to-day business. Employee uncertainty and lack of focus during integration process may also disrupt our business. Further, we may not be able to successfully integrate any acquisitions that we do make into our existing business operations, including the Proposed Merger. For example, if we fail to successfully integrate and operate the gas purification business we acquired from SAES Getters S.p.A. in June 2018, we may not meet our revenue and bottom line objectives for the MC division or for the Company, and if we fail to successfully integrate the operations of Versum, we may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of the Proposed Merger. An inability to realize the full extent of, or any of, the anticipated benefits of the Proposed Merger, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of the shares of our common stock after the completion of the Proposed Merger. Additionally, we could assume unknown or contingent liabilities or experience negative effects on our reported results of operations from dilutive results from operations and/or from future potential impairment of acquired assets, including goodwill, related to future acquisitions. For example, despite our due diligence review, an acquired company may have inadequate or ineffective an internal financial controls, disclosure controls and procedures, cybersecurity, privacy policies and procedures, or environmental, health and safety, anti-corruption, human resource, or other policies or practices. We may experience difficulties in retaining key employees or customers of an acquired business, and our management’s attention could be diverted from other business issues.

MANUFACTURING INTERRUPTIONS OR DELAYS, FAILURE TO RESPOND TO SHIFTS IN DEMAND, AND RISKS ASSOCIATED WITH THE USE AND MANUFACTURE OF HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our manufacturing processes are complex and require the use of expensive and technologically sophisticated equipment and materials. These processes are frequently modified to improve manufacturing yields and product quality. We have, on occasion, experienced manufacturing difficulties, such as occasional critical equipment breakdowns or the introduction of impurities in the manufacturing process, which could cause lower manufacturing yields, make our products unmarketable and/or delay deliveries to customers. In addition, modification to the manufacturing process of our products may require that the affected product be re-qualified by our customers, which can increase our costs and delay our ability to sell this product to our customers. These and other manufacturing difficulties may result in the loss of sales and exposure to warranty and product liability claims.

A number of our product lines are manufactured at only one or two facilities in different countries. A disruption at these facilities could impact our sales until another facility could commence or expand production of such products. We have in the past moved, and we may in the future move, the manufacture of certain product lines from one of our plants to another, usually to enhance efficiency and cost effectiveness of our manufacturing operations and to better serve customers located in various countries. If we fail to efficiently and effectively transfer and re-establish the manufacturing processes in the destination plant, we may not be able to meet customer order, we may lose credibility with our customers and our business may be harmed. Even if we successfully move our manufacturing processes, there is no assurance that we will achieve anticipated cost savings and efficiencies.

Our ability to increase sales of our products, particularly our capital equipment products, depends in part upon our ability to timely ramp up our manufacturing capacity for such products, often in as little as a few months, and to quickly mobilize our supply chain. If we are unable to accurately foresee or anticipate rapid shifts in demand, expand our manufacturing capacity on a timely basis, manage such expansion effectively and obtain an increase in required raw materials from our supply chain, our customers could seek such products from our competitors, and our market share could be reduced. Additionally, we typically operate our business on a just-in-time shipment basis with a modest level of backlog, ordering supplies and planning production based on internal demand forecasts. The failure to accurately forecast demand for our products, in terms of both volume and product type, has in the past led to, and may in the future lead to, delays in product shipments, disappointment of customer expectations, and, alternatively, an increased risk of excess and obsolescence of our inventory. If we fail to accurately forecast demand for our products, our business, financial condition and operating results could be materially and adversely affected.

Our operations involve, and we are exposed to the risks associated with, the use and the manufacture of hazardous materials, in particular, specialty chemical manufacturing, and the related storage and transportation of raw materials, products and waste in our manufacturing facilities or distribution centers. In addition, a failure of one of our products at a customer site could interrupt the business operations of the customer. For example, while we believe that our SDS and VAC delivery systems are the safest available in the industry, as with any products involved in the transport, storage and delivery of toxic gases, if a leak were to occur during transport, during storage or during delivery at our customers’ location, serious damage could result including injury or death to any person exposed to those toxic gases creating significant product liability for us. There can be no assurance that our insurance will be adequate to satisfy any such liabilities and our financial results or financial condition could be adversely affected.

LOSS OF OUR KEY PERSONNEL, WHO HAVE SIGNIFICANT EXPERIENCE IN THE SEMICONDUCTOR INDUSTRY AND TECHNOLOGICAL EXPERTISE, COULD HARM OUR BUSINESS, WHILE OUR INABILITY TO ATTRACT AND RETAIN NEW QUALIFIED PERSONNEL COULD INHIBIT OUR ABILITY TO OPERATE AND GROW OUR BUSINESS SUCCESSFULLY.

Many of our key personnel have significant experience in the semiconductor industry and deep technical expertise. The loss of the services of one or several of our key employees or an inability to attract, train and retain qualified and skilled employees, specifically research and development and engineering personnel, could inhibit our ability to operate and grow our business successfully. As the semiconductor industry has experienced growth in recent years, the competition between industry participants for qualified talent, particularly those with significant experience in the semiconductor industry, has intensified. As a result, the difficulty and costs associated with attracting and retaining key employees has risen and may rise further in the future rise.

IF WE FAIL TO OBTAIN, PROTECT AND ENFORCE INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND PROSPECTS COULD BE HARMED.

Our future success and competitive position depend in part upon our ability to obtain, maintain and enforce intellectual property rights. We rely on patent, trade secret and trademark law to protect many of our major product platforms. We have obtained a number of patents relating to our products and solution. While we have filed applications for additional patents, we cannot assure you that any of our pending patent applications will be approved, that we will develop additional patentable proprietary technology, that any patents owned by or issued to us will provide us with competitive advantages or that these patents will not be challenged, invalidated, circumvented, rendered unenforceable or otherwise compromised by third parties. In addition, if we do not obtain intellectual property protection in the international jurisdictions we serve, our competitiveness in these markets could be significantly impaired, which could limit our growth and future revenue. While we routinely enter into confidentiality agreements with our employees and with third parties to protect our proprietary information and technology, these agreements may be breached by such employees or third parties, and we may not have adequate remedies for such breaches. Furthermore, our confidential and proprietary information and technology could be independently developed by or become otherwise known to third parties and third parties could design around our patents.

Competitors may misappropriate our intellectual property rights, and disputes as to ownership of intellectual property rights may arise. We may institute litigation in order to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of

infringement. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we are able to successfully enforce our rights. For example, in January 2011, we settled multiple patent litigations with Pall Corporation (which was acquired by Danaher Corporation in 2015). We prosecuted and defended these cases vigorously and incurred substantial costs in pursuing them. It may become necessary for us to initiate other costly patent litigation against our competitors in order to protect and/or perfect our intellectual property rights. We cannot predict how any existing or future litigation will be resolved or what its impact will be on us.

Our commercial success depends, in part, on our ability to avoid infringing or misappropriating any patents or other proprietary rights owned by third parties. If we are found to infringe or misappropriate a third party’s patent or other proprietary rights, we could be required to pay damages to such third party, alter our products or processes, obtain a license from the third party or cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. If we are required to obtain a license from a third party, there can be no assurance that we will be able to do so on commercially favorable terms or at all.

OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY CLIMATE CHANGE OR NATURAL CATASTROPHES IN THE LOCATIONS IN WHICH WE, OUR CUSTOMERS OR OUR SUPPLIERS OPERATE, SUCH AS THE MARCH 2011 EARTHQUAKE AND TSUNAMI IN JAPAN, HURRICANE HARVEY IN EAST TEXAS, HURRICANE IRMA IN FLORIDA IN 2017 AND THE WILDFIRES IN COLORADO SPRINGS, COLORADO AND CALIFORNIA IN 2012, 2017 AND 2018.

We have manufacturing and other operations in locations subject to severe weather and natural catastrophes which could disrupt operations, such as typhoons in Taiwan and China, earthquakes and tsunamis in Japan in 2011, hurricanes in east Texas (Hurricane Harvey) and in Florida (Hurricane Irma), each in 2017, and wildfires in Colorado Springs, Colorado in 2012 and in California in 2017 and 2018. In addition, our suppliers and customers also have operations in such locations. A natural disaster that results in a prolonged disruption to our operations, or our customers’ or suppliers’ operations, may adversely affect our results of operations and financial condition. Also, climate change poses both regulatory and physical risks that could harm our results of operations or affect the way we conduct our businesses. While our business continuity plans enabled us to mitigate the impact to our operations of the events described above, there can be no assurance that such plans will be effective in the future or that such catastrophes will not disrupt our ability to manufacture and deliver products to our customers, resulting in an adverse impact on our business and results of operations.

WE MAY BE SUBJECT TO INFORMATION TECHNOLOGY SYSTEM FAILURES, NETWORK DISRUPTIONS AND BREACHES IN DATA SECURITY, WHICH COULD DAMAGE OUR REPUTATION AND ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.

In the ordinary course of our business, we collect and store sensitive data, including our financial information, intellectual property, confidential information, proprietary business information and that of our customers, suppliers and business partners and personally identifiable information of our employees in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Information technology system failures, network disruptions and breaches of data security from cyber-attacks, employee error or social media use on our computers, through failure of our internet service providers and other cloud computing service providers to successfully secure their own systems or from other causes could disrupt our operations, cause customer communication and order management issues, cause the unintentional disclosure of customer, employee and proprietary information, cause disruption in our transaction processing or lead to issues with maintaining our controls over our financial reporting, which could affect our reputation and reporting of financial results.

All information systems are subject to disruption, breach or failure. While our management has implemented network security procedures, virus protection software, intrusion prevention systems, access control, emergency recovery processes and internal control measures, we have experienced, and expect to continue to be subject to, cybersecurity threats and incidents ranging from employee error or misuse, to individual attempts to gain unauthorized access to our systems, to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date. Furthermore, there can be no assurance that a system failure or data security breach will not occur and have a material adverse effect on our financial condition results of operations and cash flows.

Relatedly, new laws and regulations, such as the European Union General Data Protection Regulation 2016 that became effective May 2018, add to the complexity of our compliance obligations, which may increase compliance costs, and a failure to comply with such laws and regulations could result in significant penalties.

WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD CAUSE US TO INCUR SIGNIFICANT LIABILITIES AND EXPENSES.

Failure to comply with the wide variety of federal, state, local and non-U.S. regulatory requirements relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation, of, and human exposure to, hazardous chemicals, which

have tended to become stricter over time, could result in future liabilities or the suspension of production or shipment. For example, the Frank R. Lautenberg Chemical Safety for the 21st Century Act modified the Toxic Control Substances Act, or TSCA, by requiring the Environmental Protection Agency, or the EPA, to prioritize and evaluate the environmental and health risks of existing chemicals and provides EPA with greater authority to regulate chemicals posing unreasonable risks. According to this statute, the EPA is required to make an affirmative finding that a new chemical will not pose an unreasonable risk before such chemical can go into production. As a result, TSCA has been updated so that it operates in a similar fashion to the Registration, Evaluation, and Authorization of Chemicals, or REACH, legislation in Europe. Regulations similar to REACH have been enacted in South Korea and Taiwan. These laws and regulations, among others, increase the complexity and costs of transporting our products from the country in which they are manufactured, to the location of our customer. Any further changes to these and similar regulations in the countries in which we operate or sell into could restrict our ability to expand our facilities or to build or acquire new facilities, require us to acquire costly control equipment, cause us to incur expenses associated with remediation of contamination, modify our manufacture or shipping processes, or otherwise increase our cost of doing business and have a negative impact on our financial condition, results of operations and cash flows.

The nature of our business exposes us to risk of liability for environmental contamination if hazardous materials are released into the environment, which could result in substantial losses, reputational harm, increase in our insurance cost or otherwise adversely impact our results of operations.

We have facilities in many foreign countries and, as a result, are subject to taxation at various rates and audit by a number of taxing authorities. Our results of operations could be affected by changes in applicable tax rates or audits by the taxing authorities in countries in which we operate or in the countries from which we purchase raw materials, changes in laws and regulations governing calculation and location of earned profit and taxation thereof, changes in laws and regulations affecting our ability to realize deferred tax assets on our balance sheet and changes in laws and regulations relating to the repatriation of cash into the United States. Each quarter we forecast our tax liability based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax liability may change.

We have undertaken a number of complex internal reorganizations of our foreign subsidiaries in order to rationalize and streamline our foreign operations, focus our management efforts on certain local opportunities and take advantage of favorable business conditions in certain localities. While we have exercised diligence in undertaking these internal reorganizations, there can be no assurance that these reorganizations, or any future internal reorganization, will not result in adverse tax consequences in the United States or in foreign countries in which we have operations. This could adversely impact our profitability from foreign operations and result in a material reduction in our results of operations.

The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) significantly changed how the U.S. taxes corporations, including limitations on the deductibility of interest expense and executive compensation, and the imposition or acceleration of taxation on certain foreign income, each of which may increase our tax expense. Both the Tax Cuts and Jobs Act and subsequent regulations and interpretations require complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Cuts and Jobs Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Cuts and Jobs Act will be applied or otherwise administered that is different from our interpretation. As additional clarification and guidance is issued regarding the Tax Cuts and Jobs Act, we may make adjustments to amounts that we have recorded, which may materially impact our provision for income taxes in the period in which the adjustments are made.

Various other jurisdictions, including members of the Organization for Economic Cooperation and Development, are considering changes to their tax laws, including provisions intended to address base erosion and profit shifting by taxpayers. Any tax reform adopted in these or other countries may exacerbate the risks described above.

UNCERTAINTY AND VOLATILITY IN THE GLOBAL ECONOMY COULD ADVERSELY AFFECT OUR RESULTS.

Financial markets in the United States, Europe and Asia have experienced extreme disruption in the recent past. Such disruption included, among other things, volatility in securities prices, severely diminished liquidity and credit availability, rating downgrades of sovereign debt, declining valuation of certain investments, declines in consumer confidence, declines in economic growth, volatility in unemployment rates, and uncertainty about economic stability. Such conditions have had a significant adverse impact on our industry, our financial condition and results of operations. There may be further changes in the global economy, which could lead to further challenges in our business and negatively impact our financial results. For example, the U.K. vote in favor of leaving the European Union may cause instability and uncertainty in European economies and may negatively impact the outlook for the global economy. Tightness of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations and could result in a

decrease in orders and spending for our products and services. We are unable to predict the likely duration and severity of any disruption in regional or global financial markets and adverse economic conditions and the effects they may have on our business and financial condition. If uncertain economic conditions return or deteriorate, our business and results of operations could be further materially and adversely affected.

Risks Related to Our Indebtedness

WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS.

As of December 31, 2018, we have approximately an aggregate principal amount of $950.0 million of indebtedness outstanding, including our 4.625% senior unsecured notes due April 1, 2026 (the “Notes”, and the indenture that governs the Notes, the “Indenture”) and our senior secured term loan facility due 2025 (the “Term Loan Facility”). In addition, we have approximately $300 million of unutilized capacity under our senior secured revolving credit facility due 2023 (the “Revolving Facility”, and together with the Term Loan Facility, the “Credit Facilities”, and the credit agreement that governs the Credit Facilities, the “Credit Agreement”).

Our debt could have important consequences, including:

•

making it more difficult for us to satisfy our obligations with respect to the Notes and the Credit Facilities;

•

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate purposes;

•

requiring a substantial portion of our cash flow to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes;

•

increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;

•

exposing us to the risk of increased interest expense as certain of our borrowings, including borrowings under the Credit Facilities, include variable interest rates;

•

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

•

preventing us from raising funds necessary to repurchase all Notes tendered to us upon the occurrence of certain change of control repurchase events, which could constitute a default under the Indenture;

•

placing us at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates; and

•

increasing our cost of borrowing.

In addition, the Indenture and the Credit Agreement contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our debt.

DESPITE OUR CURRENT LEVEL OF INDEBTEDNESS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT, WHICH COULD FURTHER EXACERBATE THE RISKS TO OUR FINANCIAL CONDITION DESCRIBED ABOVE.

We may incur significant additional indebtedness in the future. Although the Indenture and the Credit Agreement restrict our ability to incur additional indebtedness, the restrictions are subject to a number of significant qualifications and exceptions, such as indebtedness to finance working capital, capital expenditures, investments and acquisitions, or other purposes, and the additional indebtedness that we may incur while remaining in compliance with these restrictions could be substantial. For example, the Credit Agreement provides that we have the right to request additional loans and commitments in an aggregate amount not to exceed the greater of $400 million and 100% of EBITDA and additional amounts if our secured net leverage ratio is less than a specified ratio or, in the case of unsecured loans or other unsecured debt, or loans or other debt secured by junior liens, if our total net leverage ratio is less than a specified ratio. The Indenture does not limit the Company’s ability to incur unsecured indebtedness. Moreover, the restrictions in the Indenture on our ability to incur additional secured indebtedness are subject to a number of significant exceptions and qualifications that may permit us to incur a substantial amount of additional secured indebtedness. Further, although the Indenture limits the ability of a non-guarantor subsidiary to incur indebtedness unless it also guarantees the Notes, this limitation is subject to a number of significant exceptions and qualifications, and the amount of indebtedness incurred in compliance with the Indenture could be substantial. These restrictions do not prevent us from incurring monetary obligations that do not constitute indebtedness. If we add new indebtedness and other monetary obligations to our current debt levels, the related risks that we now face could intensify.

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH TO SERVICE OUR INDEBTEDNESS AND MAY BE FORCED TO TAKE OTHER ACTIONS, WHICH MAY NOT BE SUCCESSFUL, TO SATISFY OUR OBLIGATIONS UNDER OUR INDEBTEDNESS.

We may be unable to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal of, premium, if any, and interest on our indebtedness. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance and the condition of the capital markets, which are subject to prevailing economic, industry and competitive conditions, as well as certain financial, business, legislative, political, regulatory and other factors beyond our control. If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems, be forced to reduce or delay investments and capital expenditures, dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, and our financial position and results of operations could be materially and adversely affected.

Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our ability to dispose of assets and use the proceeds from those dispositions is restricted by the agreements governing our indebtedness, and we may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

If we cannot make scheduled payments on our debt, we will be in default, and holders of the Notes and lenders under the Credit Facilities could declare all outstanding principal and interest to be due and payable, the lenders under the Revolving Facility could terminate their commitments to advance further loans, our secured lenders could foreclose against the assets securing their borrowings, and we could be forced into bankruptcy or liquidation.

THE TERMS OF THE CREDIT AGREEMENT RESTRICT OUR CURRENT AND FUTURE OPERATIONS, PARTICULARLY OUR ABILITY TO RESPOND TO CHANGES OR TO CONDUCT OUR BUSINESS OR RAISE ADDITIONAL FUNDS.

The Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to take action that may be in our long-term best interest, including restrictions on our ability to:

•

incur certain liens;

•

incur additional indebtedness and guarantee indebtedness;

•

pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

•

prepay, redeem or repurchase certain debt;

•

make investments, loans, advances and acquisitions;

•

sell or otherwise dispose of assets, including capital stock of our subsidiaries;

merge or sell all or substantially all of our assets or incur a change of control in our capital stock ownership.

In addition, the restrictive covenants in the Credit Agreement may, at certain times based on the outstanding amount of revolving borrowings, unreimbursed letter of credit drawings and undrawn letters of credit, require us to maintain a secured net leverage ratio. Our ability to meet this financial ratio can be affected by events beyond our control.

Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of some or all of our indebtedness, which could lead to bankruptcy, reorganization or insolvency.

These restrictions may affect our ability to grow in accordance with our plans and could adversely affect our ability to:

•

finance our operations;

•

make needed capital expenditures;

•

make strategic acquisitions or investments or enter into joint ventures;

•

withstand a future downturn in our business, the industry or the economy in general;

compete effectively and engage in business activities, including future opportunities, that may be in our best interest; and

•

plan for or react to market conditions or otherwise execute our business strategies.

Risks Related to Owning our Common Stock

THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE.

The price of our common stock has been volatile in the past and may be volatile in the future. In 2018, the closing price of our stock on The NASDAQ Global Select Market, or NASDAQ, ranged from a low of $24.44 to a high of $38.85, and, as in past years, the price of our common stock may show greater volatility.

The trading price of our common stock is subject to significant volatility in response to various factors, some of which are beyond our control or may be unrelated to our operating results, and which may adversely affect the market price of our common stock, including the following: the failure to meet the published expectations of securities analysts; changes in financial estimates by securities analysts; press releases or announcements by, or changes in market values of, comparable companies; volatility in the markets for high-technology stocks, general stock market price and volume fluctuations, which are particularly common among securities of high-technology companies; stock market price and volume fluctuations attributable to inconsistent trading volume levels; the public perception of equity values of publicly traded companies and the other risks and uncertainties described in this Annual Report on Form 10-K and in our other filings with the SEC. Such fluctuations in our results could cause our stock price to decline significantly. We believe that period-to-period comparisons of our results of operations may not be meaningful, and you should not rely upon them as indicators of our future performance. Future decreases in our stock price may adversely impact our ability to raise sufficient additional capital in the future, if needed.

THERE CAN BE NO ASSURANCE THAT WE WILL CONTINUE TO DECLARE CASH DIVIDENDS OR REPURCHASE OUR SHARES AT ALL OR IN ANY PARTICULAR AMOUNTS

Our Board of Directors initiated a quarterly dividend in November 2017. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and periodic determinations by our Board of Directors that such actions are in the best interest of our stockholders and are in compliance with all laws and applicable agreements. Future dividends and share repurchases may also be affected by, among other factors, our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; legal risks; changes in federal and state income tax laws or corporate laws; contractual restrictions, such as financial or operating covenants in our debt arrangements; availability of onshore cash flow; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction or suspension in our dividend payments could have a negative effect on the price of our common stock.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.

Our restated certificate of incorporation and by-laws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include limitations on actions by our stockholders by written consent.

Our restated certificate of incorporation makes us subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits publicly held Delaware corporations to which it applies from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. This provision could discourage others from bidding for our shares of common stock and could, as a result, reduce the likelihood of an increase in the price of our common stock that would otherwise occur if a bidder sought to buy our common stock.

Our restated certificate of incorporation provides that our board of directors is authorized to issue from time to time, without further stockholder approval, up to 5,000,000 shares of preferred stock in one or more series and to fix and designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, redemption rights and terms of redemption and liquidation preferences. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. Our issuance of preferred stock may have the effect of delaying or preventing a change in control. Our issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could have the effect of decreasing the market price of our common stock.

YOUR PERCENTAGE OWNERSHIP IN US MAY BE DILUTED BY FUTURE ISSUANCES OF CAPITAL STOCK, WHICH COULD REDUCE YOUR INFLUENCE OVER MATTERS ON WHICH STOCKHOLDERS VOTE.

Subject to applicable NASDAQ standards, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares. Issuances of common stock or the exercise of employee stock options would dilute your percentage ownership interest, which will have the effect of reducing your influence over matters on which our stockholders vote. In addition, we may issue substantial quantities of our common stock in order to effect acquisitions which would also dilute your ownership interest. If the issuances are made at prices that reflect a discount from the then current trading price of our common stock, your interest in the book value of our common stock might be diluted.

Risks Related to Our Pending Merger with Versum Materials, Inc.

FAILURE TO COMPLETE OUR PENDING MERGER WITH VERSUM MATERIALS, INC. (VERSUM) COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS AND COULD NEGATIVELY IMPACT OUR STOCK PRICE.

On January 27, 2019, we entered into an agreement and plan of merger pursuant to which Versum will merge with and into Entegris. We will incur significant transaction costs relating to the merger, including legal, accounting, financial advisory, regulatory and other expenses. In general, these expenses are payable by us whether or not the merger is completed. If the merger is not completed under specific circumstances provided in the agreement and plan of merger, we may be required to pay Versum a termination fee of $155 million. The payment of such transaction costs or termination fees could have an adverse effect on our financial condition, results of operations or cash flows. In addition, we could be subject to litigation in the event the merger is not consummated, which could subject us to significant liability for damages and result in the incurrence of substantial legal fees. The current market price of our stock may reflect an assumption that the pending merger will occur and failure to complete the merger could result in a decline in our stock price.

Our principal executive offices are located in Billerica, Massachusetts. We also have manufacturing, research and development facilities in the United States, Japan, France, Taiwan, South Korea, Singapore, China and Malaysia. Information about our principal facilities is set forth below:

Location

Principal Function

Approximate

Square Feet

Leased/

Owned

Reporting Segment

Bedford, Massachusetts

Research & Manufacturing

80,000

Owned

MC & SCEM

Billerica, Massachusetts(1)

Executive Offices, Research & Manufacturing

175,000

Leased

MC & SCEM

Bloomington, MN

Research & Manufacturing

68,000

Leased

AMH

Burnet, TX

Research & Manufacturing

77,000

Owned

SCEM

Chaska, Minnesota

Executive Offices, Research & Manufacturing

186,000

Owned

AMH

Colorado Springs, CO

Manufacturing

82,000

Owned

AMH

Danbury, CT

Research & Manufacturing

73,000

Leased

SCEM

Decatur, Texas

Manufacturing

359,000

Owned

SCEM

Hsin-chu, Taiwan

Executive Offices, Sales Research & Manufacturing

146,330

Leased

MC, SCEM & AMH

Yangmei City, Taiwan

Manufacturing

40,000

Leased

AMH

JangAn, South Korea

Manufacturing

127,000

Owned

SCEM & AMH

Kulim, Malaysia

Manufacturing

195,000

Owned

SCEM & AMH

Russellville, Arkansas

Manufacturing

113,127

Leased

SCEM

San Luis Obispo, CA

Manufacturing

37,000

Owned

MC

San Luis Obispo, CA

Manufacturing

34,000

Leased

MC

Shanghai, China

Executive Offices & Research

24,000

Leased

MC, SCEM & AMH

Suwon, South Korea

Executive Offices & Research

42,000

Leased

MC & SCEM

Tokyo, Japan

Executive Offices, Sales & Research

28,623

Leased

MC, SCEM & AMH

Wonju City, South Korea

Manufacturing

39,000

Owned

AMH

Yonezawa, Japan

Manufacturing

185,000

Owned

MC & AMH

(1) This lease has been extended through September 30, 2026 and is subject to one five-year renewal option.

We lease approximately 13,000 square feet of research and development and manufacturing office space located in San Diego, CA, approximately 31,000 square feet of manufacturing space located in Franklin, MA, approximately 10,000 square feet of office space in Round Rock, TX, approximately 3,300 square feet of office space in Tempe, AZ, approximately 10,000 square feet of manufacturing space in Goleta, CA, approximately 4,000 square feet of manufacturing space in Logan, Utah, approximately 5,200 square feet of office and manufacturing space in Port Richey, FL, approximately 15,000 square feet of manufacturing space in Anseong, South Korea, approximately 9,000 square feet of office space in Moirans, France and approximately 10,000 square feet of office space in Dresden, Germany.

We lease approximately12,000 square feet for our Asia manufacturing management offices in Singapore. In addition, we maintain a worldwide network of sales, service, repair or cleaning centers in the United States, Germany, France, Israel, Japan, Malaysia, Taiwan, Singapore, China and South Korea. Leases for our facilities expire through September 2026. We currently expect to be able to extend the terms of expiring leases or to find suitable replacement facilities on reasonable terms.

We believe that our facilities are well-maintained and suitable for their respective operations. All of our facilities are generally utilized within a normal range of production volume.

Item 3. Legal Proceedings.

As of December 31, 2018, we were not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows. From time to time the Company may be a party to litigation involving claims against the Company arising in the ordinary course of our business. We are not aware of any material potential litigation or claims against us which would have a material adverse effect upon our financial statements.

Bertrand Loy has been our Chief Executive Officer, President and a director since November 2012. Mr. Loy served as our Executive Vice President and Chief Operating Officer since 2008. From August 2005 until July 2008, he served as our Executive Vice President and Chief Administrative Officer in charge of our global supply chain and manufacturing operations. He served as the Vice President and Chief Financial Officer of Mykrolis from January 2001 until August 2005. Prior to that, Mr. Loy served as the Chief Information Officer of Millipore Corporation during 1999 and 2000. From 1995 until 1999, he served as the Division Controller and Head of Manufacturing for Millipore’s Laboratory Water Division. From 1989 until 1995, Mr. Loy served Sandoz Pharmaceuticals (now Novartis) in a variety of financial, audit and controller positions located in Europe, Central America and Japan. Mr. Loy served as a director of BTU International, Inc. (supplier of advanced thermal processing equipment) until its acquisition in January 2015. He also serves as a director of Harvard Bioscience, Inc. (scientific equipment) since November 2014 and has been a director for SEMI (Semiconductor Equipment and Materials International) (global high-technology manufacturing trade association) since July 2013.

Gregory B. Graves has served as our Executive Vice President and Chief Financial Officer since July 2008. Prior to that he served as Senior Vice President and Chief Financial Officer since April 2007. Prior to April 2007, he served as Senior Vice President, Strategic Planning & Business Development since the effectiveness of the merger with Mykrolis. Mr. Graves served as the Chief Business Development Officer of Entegris Minnesota since September 2002 and from September 2003 until August 2004 he also served as Senior Vice President of Finance. Prior to joining Entegris Minnesota, Mr. Graves held positions in investment banking and corporate development, including at U.S. Bancorp Piper Jaffray from June 1998 to August 2002 and at Dain Rauscher from October 1996 to May 1998. Since May 2017, Mr. Graves has served as a director of Power Plug Inc. (energy solutions provider).

Todd Edlund has been our Executive Vice President and Chief Operating Officer since July 2016. Prior to that he was our Senior Vice President and Chief Operating Officer since November 2014. After the merger with ATMI, Mr. Edlund served as Senior Vice President and General Manager of our Critical Materials Handling business and prior to the merger with ATMI, he was the Vice President and General Manager of our Contamination Control Solutions division since December 2007. He served as the Vice President and General Manager of our Liquid Systems business unit from 2005 to 2007, and prior to that as Entegris Minnesota’s Vice President of Sales for semiconductor markets from 2003 to 2005. Prior to 2003, Mr. Edlund held a variety of positions with our predecessor companies since 1995.

Sue Rice joined us as our Senior Vice President of Human Resources in September 2017. Prior to that, Ms. Rice served as Senior Vice President and Chief Human Resources Officer for Thermo Fisher Scientific from 2013 to 2017, Region Vice President HR Asia Pacific & Emerging Markets from 2009 to 2013 and Group Vice President, HR Analytical Technologies Group from 2006 to 2009. Prior to that, Ms. Rice held senior human resource positions with Fidelity Human Resources Services Company and Sherbrooke Associates.

Gregory Marshallhas been our Senior Vice President, Quality, EH&S and Entegris Business Support since August 2016. Prior to that Mr. Marshall served as our Vice President, Quality and EH&S since March 2010 and our Global Director of Quality since

the merger with Mykrolis Corporation, prior to which he served as the Director of Quality for Mykrolis. Prior to joining Mykrolis, Mr. Marshall served as the Director of US Quality for Kokusai Semiconductor Equipment Corporation.

Corey Rucci has served as our Senior Vice President, Business Development since January 2018, having served as Vice President, Business Development since February 2014. Prior to that he served as Vice President and General Manager of our Specialty Materials Division since 2011 and as General Manager of Poco Graphite, Inc. (POCO) since 2008 when we acquired POCO. Prior to joining Entegris, Mr. Rucci served POCO as the President and Chief Operating Officer since 2007, Chief Operating Officer since 2005, Chief Financial Officer since 2001 and Vice President of Business Development since 1998. Prior to that he worked at UNOCAL Corp. for 17 years in a variety of accounting, marketing and business development roles.

Stuart Tison has been our Senior Vice President, Specialty Chemicals and Engineered Materials since July 2016. Prior to that, Mr. Tison served as Vice President, Specialty Gas Solutions since February 2015, as Vice President, Business Development since January 2010 and as Vice President, Corporate Development since July 2007. Prior to that he served Celerity, Inc. as Vice President, Engineering and served Entegris predecessor companies Mykrolis and Millipore in a variety of sales, marketing, business development and engineering roles.

Clint Haris has been our Senior Vice President, Microcontamination Control since July 2016. Prior to that, Mr. Haris served as our Vice President, Liquid Microcontamination Control since August 2014. Prior to joining Entegris, Mr. Haris served in a variety of executive roles at Brooks Automation Inc. including Senior Vice President, Life Science Systems from 2010 to 2014 and Senior Vice President and General Manager, Systems Solutions from 2009 to 2010.

William Shaner has been our Senior Vice President, Advanced Materials Handling since July 2016. Prior to that, Mr. Shaner served as our Senior Vice President, Global Operations since February 2014 and as our Vice President and General Manager, Microenvironments division since 2007. He has served in a variety of sales, marketing, business development and engineering roles since joining Entegris in 1995.

Bruce W. Beckman has been our Senior Vice President, Finance since February 2018. Prior to that, Mr. Beckman served as Vice President, Finance since joining Entegris in 2015. From 1990 to 2015, Mr. Beckman worked in numerous capacities for General Mills, Inc., including Vice President, Finance, Meals Division, Director of Corporate Planning & Analysis and Director of Internal Controls.

Michael D. Sauer has been our Vice President, Controller and Chief Accounting Officer since June 2012. Prior to that, he served as the Corporate Controller since 2008. From the time of the merger with Mykrolis until April 2008, Mr. Sauer served as Director of Treasury and Risk Management. Mr. Sauer joined Fluoroware, Inc., a predecessor to Entegris Minnesota in 1988 and held a variety of finance and accounting positions until 2001 when he became the Director of Business Development for Entegris Minnesota, the successor to Fluoroware, serving in that position until the merger with Mykrolis.

Entegris’ Common Stock, $0.01 par value, trades on the NASDAQ Global Select Market under the symbol “ENTG”. As of February 4, 2018, there were 1,057 shareholders of record. On February 4, 2018, the last sale price reported on the Nasdaq Global Select Market for our common stock was $33.64 per share.

Dividend Policy:

Holders of the Company’s common stock are entitled to receive dividends when and if they are declared by the Company’s Board of Directors. The Company’s Board of Directors declared a cash dividend of $0.07 per share during the first, second, third and fourth quarters of 2018, which totaled $39.7 million.

On January 16, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.07 per share to be paid on February 20, 2019 to shareholders of record as of January 30, 2019.

Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our board of directors. Furthermore, the credit agreements governing the New Credit Facilities contain restrictions that may limit our ability to pay dividends.

Issuer Sales of Unregistered Securities During the Past Three Years:

None

Comparative Stock Performance

The following graph compares the cumulative total shareholder return on the common stock of Entegris, Inc. from December 31, 2013 through December 31, 2018 with the cumulative total return of (1) The NASDAQ Composite Index, and (2) The Philadelphia Semiconductor Index, assuming $100 was invested at the close of trading December 31, 2013 in Entegris, Inc. common stock, the NASDAQ Composite Index and the Philadelphia Semiconductor Index and that all dividends are reinvested.

On February 13, 2018, the Company’s Board of Directors authorized a repurchase program covering up to an aggregate of $100 million of the Company’s common stock in open market transactions and in accordance with one or more pre-arranged stock trading plans to be established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, over a period of twenty-four months. This repurchase program represents a further renewal of the repurchase program originally authorized by the Board of Directors on February 5, 2016, which had been subsequently renewed on February 15, 2017. On November 19, 2018, the Company’s Board of Directors authorized the repurchase of up to an additional $250 million in aggregate principal amount of the Company’s common stock. The authorization is in addition to the amount remaining under the share repurchase program previously authorized in February 2018.

The following table provides information concerning shares of the Company’s Common Stock $0.01 par value purchased during the three months ended December 31, 2018:

Period

(a)

Total Number of Shares Purchased

(b)

Average Price Paid per Share

(c)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d)

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

September 29 through November 3, 2018

1,110,600

$26.95

1,110,600

$45,508,371

November 4 through December 1, 2018

2,045,271

$27.31

2,045,271

$239,657,590

December 2 through December 31, 2018

2,394,518

$26.53

2,394,518

$176,127,662

Total

5,550,389

5,550,389

The Company issues restricted stock unit awards (RSUs) under its equity incentive plans. In the consolidated financial statements, the Company treats shares of common stock withheld for tax purposes on behalf of its employees in connection with the vesting of RSUs as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under the Company’s authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.

The table that follows presents selected financial data for each of the last five years from the Company’s consolidated financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The selected financial data set forth below as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 are derived from our audited financial statements included in this Annual Report on Form 10-K. All other selected financial data set forth below is derived from our audited financial statements not included in this Annual Report on Form 10-K. The selected financial data set forth below as of December 31, 2018 and for the year ended December 31, 2018 includes the results of operations of our 2018 acquisitions, see footnote 3 for additional discussion. Our historical results are not necessarily indicative of our results of operations to be expected in the future.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the Company’s consolidated financial condition and results of operations should be read along with the consolidated financial statements and the accompanying notes to the consolidated financial information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described in the “Cautionary Statements” sections of this Item 7 below. The Company’s actual results may differ materially from those contained in any forward-looking statements. You should review the Item 1A “Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Cautionary Statements

This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “should,” “may,” “will,” “would” or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include those about future period guidance; projected sales, net income, net income per diluted share, non-GAAP EPS, non-GAAP net income and other financial metrics; our performance relative to our markets; market and technology trends, including the duration and drivers of any growth trends; the development of new products and the success of their introductions; the focus of our engineering, research and development projects; our ability to execute on our business strategies; our capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repayments and potential acquisitions; the effect of the Tax Cuts and Jobs Act; future capital and other expenditures; the Company’s expected tax rate; the impact of accounting pronouncements; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this Annual Report on Form 10-K, are not guarantees of future performance and involve substantial risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors and additional information described in this Annual Report on Form 10-K under the caption “Risk Factors,” elsewhere in this Annual Report on Form 10-K and in our other periodic filings. Except as required under the federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update publicly any forward-looking statements contained herein.

Overview

This overview is not a complete discussion of the Company’s financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of its financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows, and must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.

The Company is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. Our mission is to leverage our unique breadth of capabilities to create value for our customers by developing mission-critical solutions to maximize manufacturing yields, reduce manufacturing costs and enable higher device performance.

Our technology portfolio includes approximately 21,000 standard and customized products and solutions to achieve the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity. The Company’s customers consist primarily of semiconductor manufacturers, semiconductor equipment and materials suppliers as well as thin film transistor-liquid crystal display (TFT-LCD) and hard disk manufacturers, which are served through direct sales efforts, as well as sales and distribution relationships, in the United States, Asia, Europe and the Middle East.

Our business is organized and operated in three operating segments which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor

industry and other high-technology industries. While these segments have separate products and technical know-how, they share a global generalist sales force, common business systems and processes, technology centers, and strategic and technology roadmaps. We leverage our expertise from these three segments to create new and increasingly integrated solutions for our customers. See note 16 to the consolidated financial statements for additional information on the Company’s three segments.

Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of the Company, include:

•

Level of sales Since a significant portion of the Company’s product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short-to-medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company’s sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuation.

•

Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company’s production operations, among others.

•

Fixed cost structure The Company’s operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short-term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company’s profitability.

Overall Summary of Financial Results for the Year Ended December 31, 2018

Total net sales for the year ended December 31, 2018 were $1,550.5 million, up $208.0 million, or 15%, from sales of $1,342.5 million for the year ended December 31, 2017.

Exclusive of sales associated with acquisitions of $80.0 million and favorable foreign currency translation effects of $8.2 million, the Company’s sales increased 9%, reflecting an increase in overall demand for the Company’s products from semiconductor industry customers, particularly in the sale of fluid handling products, liquid chemistry filtration solutions and certain specialty materials products. The sales increase in 2018 was driven primarily by higher volume and the effect of selling price erosion was nominal. Semiconductor industry demand in 2018 was driven by improved demand from device makers, as wafer starts and semiconductor unit production increased, higher industry fab utilization rates, and node transitions. The Company believes sales of its products in 2018 exceeded the overall semiconductor industry growth rate.

The Company’s gross profit rose by $110.8 million for the year ended December 31, 2018, to $719.8 million, up from $609.0 million for the year ended December 31, 2017. Accordingly, the Company reported a 46.4% gross margin rate compared to 45.4% in 2017. The gross profit and gross margin figures for 2018 include an incremental cost of sales charge of $6.9 million associated with the sale of inventory acquired in the SAES Pure Gas business (SPG) and $0.4 million severance related to organization realignment charges. In addition, the gross profit and gross margin figures for 2017 included impairment charges of $6.1 million related to certain equipment-related impairment and severance related to organizational realignment charges. Excluding those charges, the Company’s gross margin for 2018 was 46.9% and for 2017 was 45.8%.

The Company’s selling, general and administrative (SG&A) and engineering, research and development (ER&D) expenses increased moderately in 2018, mainly reflecting higher compensation costs and the inclusion in SG&A and ER&D expenses of SPG’s infrastructure, deal costs and the cost of integration activities.

The Company’s income tax expense decreased significantly in 2018, primarily due to the reduction of the U.S. corporate tax rate from 35% in 2017 to 21% in 2018, a $34.5 million tax benefit associated with legal entity restructuring and the absence of a one-time charge of $66.7 million related to the impact of the Tax Cuts and Jobs Act incurred in 2017.

As a result of the aforementioned and other factors discussed below, net income for 2018 was $240.8 million, or $1.69 per diluted share, compared to net income of $85.1 million, or $0.59 per diluted share, in 2017.

On January 22, 2018, the Company acquired Particle Sizing Systems, LLC, or PSS, which provides particle sizing instrumentation for liquid applications to the semiconductor and life science industries. The total purchase price of the acquisition was approximately $37.3 million in cash. The acquisition of PSS does not constitute a material business combination.

On June 25, 2018, the Company acquired the SAES Pure Gas business, or SPG, a leading provider of high-capacity gas purification systems used in semiconductor manufacturing and adjacent markets. The total purchase price of the acquisition was approximately $352.7 million in cash, or $341.5 million net of cash acquired, subject to revision for customary working capital adjustments. The acquisition of SPG does not constitute a material business combination.

During 2018, the Company’s operating activities provided cash flow of $312.6 million. Cash and cash equivalents, and short-term investments were $482.1 million at December 31, 2018 compared with $625.4 million at December 31, 2017. The Company had long-term borrowings, including current maturities, of $938.9 million at December 31, 2018 compared with $674.4 million at December 31, 2017.

On November 6, 2018, the Company obtained a new senior secured credit facility consisting of a term loan facility of $400.0 million and a revolving credit facility of $300.0 million. The term loans were fully drawn at closing. The Company used approximately $109 million of the proceeds of the new term loans to repay and terminate its previous senior secured revolving and term loan credit facilities.

Subsequent Event

On January 28, 2019, the Company and Versum Materials, Inc., a leading specialty materials supplier to the semiconductor industry, announced that they had entered into an Agreement and Plan of Merger, dated as of January 27, 2019, pursuant to which they agreed to combine in a merger of equals. Under the terms of the agreement, Versum will merge with and into Entegris, with Entegris surviving and continuing as the surviving corporation, and Versum stockholders will receive 1.120 shares of Company common stock for each existing Versum share. The transaction is subject to certain conditions, including a majority of the outstanding shares of common stock of both Entegris and Versum approving the Merger Agreement and the receipt of approvals under U.S. and certain foreign antitrust and competition laws. We have agreed to operate our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Proposed Merger, subject to specific exceptions set forth in the Merger Agreement, and have agreed to certain other customary restrictions on operations, as set forth in the Merger Agreement.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. At each balance sheet date, management evaluates its estimates, including, but not limited to, those related to long-lived assets (property, plant and equipment, and identified intangibles), goodwill, income taxes and business combinations. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. If management made different judgments or utilized different estimates, this could result in material differences in the amount and timing of the Company’s results of operations for any period. In addition, actual results could be different from the Company’s current estimates, possibly resulting in increased future charges to earnings.

The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company’s consolidated financial statements are discussed below.

Impairment of Long-Lived Assets As of December 31, 2018, the Company had $419.5 million of net property, plant and equipment and $295.7 million of net intangible assets. The Company routinely considers whether indicators of impairment of the value of its long-lived assets, particularly its manufacturing equipment, and its intangible assets, are present. A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances (triggering events) indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:

a.

A significant decrease in the market price of a long-lived asset (asset group);

b.

A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;

c.

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;

d.

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);

e.

A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and

f.

A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

If such indicators are present, it is determined whether the sum of the estimated undiscounted cash flows attributable to the asset group in question is less than its carrying value. If less, an impairment loss is recognized based on the excess of the carrying amount of the assets in the group over its respective fair value. Fair value is determined by discounting estimated future cash flows, appraisals or other methods deemed appropriate. If the asset groups determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the fair value attributable to the asset group is less than the assets’ carrying value. The fair value of the assets then becomes the assets’ new carrying value, which is depreciated or amortized over the remaining estimated useful life of the assets.

The Company’s long-lived assets are grouped with other assets and liabilities at the lowest level (asset groups) for which the identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As described above, the evaluation of the recoverability of long-lived assets requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the identification of the asset group at the lowest level of independent cash flows, the primary asset of the group and long-range forecasts of revenue and costs, reflecting management’s assessment of general economic and industry conditions, operating income, depreciation and amortization and working capital requirements.

Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. In addition, changes in the underlying assumptions would have a significant impact on the conclusion that an asset group’s carrying value is recoverable, or the determination of any impairment charge if it was determined that the asset values were indeed impaired. The Company continually monitors circumstances and events to determine whether asset impairment testing is warranted. It is possible that in the future the Company may conclude that there is impairment of certain of its long-lived assets, and that significant impairment charges of long-lived assets may occur in future periods.

Goodwill Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The Company performs its annual impairment test as of August 31. The Company first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing qualitative factors, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any.

As of August 31, 2018, the Company’s assessment of qualitative factors informed its conclusion that it was more likely than not that a goodwill impairment did not occur. The significant qualitative factors considered include a significant increase in the Company’s share price, increasing revenues and operating cash flow for each of the Company’s reporting units combined with solid demand in the semiconductor industry driven by the Internet of Things, virtual reality, autonomous car and artificial intelligence/machine learning applications. The Company noted that a significant number of its very largest customers purchase from all of the Company’s reporting units. For example, approximately 25 customers, accounting for approximately 59% of net sales, purchase from all of the Company’s reporting units.

Income Taxes In the preparation of the Company’s consolidated financial statements, the income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and incorporates assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates management is using to manage the underlying business. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income.

The Company has deferred tax assets related to certain federal and state credit carryforwards, and foreign net operating loss carryforwards of $18.8 million and $18.0 million as of December 31, 2018 and 2017, respectively. Management believes it is more likely than not that the benefit from a portion of these carryforwards will not be realized. In recognition of this risk, the Company provided a valuation allowance of $18.1 million and $17.5 million as of December 31, 2018 and 2017, respectively, relating to these carryforwards. If the Company’s assumptions change and it determines it will be able to realize these carryforwards, the tax benefits relating to any reversal of the valuation allowance on the deferred tax assets will be recognized as a reduction of income tax expense.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.

U.S. Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35 percent to 21 percent effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company recognized the income tax effects of the Tax Cuts and Jobs Act in the financial statements included in its 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Cuts and Jobs Act was signed into law. During the period ended December 31, 2018, the company finalized its accounting for the income tax effects of the Tax Cuts and Jobs Act in accordance with management's understanding of the Tax Cuts and Jobs Act and guidance available as of the date of this filing. The Company recognized an additional measurement period adjustment increase to income tax expense of $0.7 million, an increase to income tax payable of $0.8 million and a decrease to deferred tax liability of $0.1 million, in the fourth quarter of 2018, the period in which the SAB 118 measurement period ceased.

Business Acquisitions

The Company accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items, the Company typically obtains assistance from a third-party valuation firm.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, the Company normally utilizes the “income method.” This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method (or other methods) include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.

Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.

The following table sets forth the results of operations and the relationship between various components of operations, stated as a percent of net sales, for the years ended December 31, 2018 and 2017. The Company’s historical financial data was derived from its consolidated financial statements and related notes included elsewhere in this annual report.

(Dollars in thousands)

2018

2017

% of net sales

% of net sales

Net sales

$

1,550,497

100.0

%

$

1,342,532

100.0

%

Cost of sales

830,666

53.6

733,547

54.6

Gross profit

719,831

46.4

608,985

45.4

Selling, general and administrative expenses

246,534

15.9

216,194

16.1

Engineering, research and development expenses

118,456

7.6

106,951

8.0

Amortization of intangible assets

62,152

4.0

44,023

3.3

Operating income

292,689

18.9

241,817

18.0

Interest expense

34,094

2.2

32,343

2.4

Interest income

(3,839

)

(0.2

)

(715

)

(0.1

)

Other expense, net

8,002

0.5

25,458

1.9

Income before income taxes

254,432

16.4

184,731

13.8

Income tax expense

13,677

0.9

99,665

7.4

Net income

$

240,755

15.5

$

85,066

6.3

Net sales For the year ended December 31, 2018, net sales were $1,550.5 million, up $208.0 million, or 15%, from sales for the year ended December 31, 2017. An analysis of the factors underlying the increase in net sales is presented in the following table:

(In thousands)

Net sales in 2017

$

1,342,532

Organic growth associated with volume and pricing

119,820

Increase associated with acquired businesses

79,980

Increase associated with effect of foreign currency translation

8,165

Net sales in 2018

$

1,550,497

The Company’s sales increase was due to strong across-the-board demand for the Company’s products from semiconductor industry customers, reflecting both higher industry fab utilization and semiconductor industry capital spending compared to the year-ago period. This sales increase reflected improved sales of fluid handling products, liquid chemistry filtration solutions and certain specialty materials products. Exclusive of the sales of the acquired businesses of $80.0 million of revenue for 2018 and the favorable currency translation effects of $8.2 million for the year, mainly due to the strengthening of the Japanese yen, Korean won and Euro relative to the U.S. dollar, the Company’s sales grew 9% in 2018 when compared to 2017.

On a geographic basis, in 2018, total sales to Taiwan were 19%, to North America were 22%, to South Korea were 16%, to Japan were 14%, to China were 13%, to Europe were 9% and to Southeast Asia were 7%. In 2017, total sales to Taiwan were 22%, to North America were 21%, to South Korea were 16%, to Japan were 13%, to China were 11%, to Europe were 9%, and to Southeast Asia were 8%. From 2017 to 2018, net sales to customers in South Korea, China, Europe, North America, Japan and Southeast Asia increased 12%, 37%, 15%, 21%, 24%, and 7%, respectively, while net sales to customers in Taiwan were flat.

Demand drivers for the Company’s business primarily consist of semiconductor fab utilization and production (unit-driven) as well as capital spending for new or upgraded semiconductor fabrication equipment and facilities (capital-driven). The Company analyzes sales of its products by these two key drivers. Sales of unit-driven products represented 70% of total sales and sales of capital-driven products represented 30% of total sales in 2018. This compares to a unit-driven to capital-driven ratio of 74%:26% for 2017 as a result of the Pure Gas business.

Gross profit Gross profit for 2018 increased by $110.8 million, to $719.8 million, an increase of 18% from $609.0 million for 2017. The gross margin rate for 2018 was 46.4% versus 45.4% for 2017. The gross profit and gross margin improvements reflect the improved factory utilization associated with strong sales levels and a slightly favorable sales mix. These factors were partly offset by an incremental cost of sales charge of $6.9 million associated with the sale of inventory acquired in the SAES

Pure Gas business acquisition and price erosion for certain products in response to normal competitive pressures. In addition, the gross profit and gross margin figures include impairment charges of $0.4 million and $6.1 million for the year ended December 31, 2018 and 2017, respectively, related to equipment-related and severance related to organization realignment charges.

Selling, general and administrative expenses

Selling, general and administrative expense (SG&A) consists primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and sales and marketing costs. SG&A expenses for 2018 increased $30.3 million, or 14%, to $246.5 million from $216.2 million in 2017. SG&A expenses, as a percent of net sales, decreased to 15.9% from 16.1% a year earlier, reflecting the increase in net sales.

An analysis of the factors underlying the increase in SG&A is presented in the following table:

(In thousands)

Selling, general and administrative expenses in 2017

$

216,194

Deal costs

5,121

Integration costs

3,237

Employee costs

15,181

Professional fees

2,842

Travel costs

2,164

Impairment charge related to acquired intangible assets recorded in prior year

(3,866

)

Other increases, net

5,661

Selling, general and administrative expenses in 2018

$

246,534

Engineering, research and development expenses

Engineering, research and development (ER&D) expenses related to the support of current product lines and the development of new products and manufacturing technologies was $118.5 million and $107.0 million in 2018 and 2017, respectively. ER&D expenses as a percent of net sales were 7.6% compared to 8.0% a year ago, reflecting the increase in net sales, offset by the increase in ER&D expenditures levels, primarily due to higher employee costs of $7.8 million and project costs of $3.5 million.

The Company’s overall ER&D efforts will continue to focus on the support or extension of current product lines, the development of its technologies to create differentiated and high-value products for the most advanced and demanding semiconductor applications and leveraging its unique and diverse technology portfolio to develop innovative, integrated solutions for unmet customer needs. The Company expects ER&D costs to stay relatively stable as a percentage of net sales.

Amortization of intangible assets Amortization of intangible assets was $62.2 million in 2018 compared to $44.0 million for 2017. The increase reflects the the additional amortization expense associated with the PSS acquisition completed in the first quarter of 2018 and the SPG acquisition completed in the second quarter of 2018.

Interest expense Interest expense was $34.1 million and $32.3 million in the years ended December 31, 2018 and 2017, respectively. Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. The increase in 2018 reflects higher average debt levels.

Interest income Interest income was $3.8 million and $0.7 million in the years ended December 31, 2018 and 2017, respectively. The increase reflects higher average U.S. cash levels earning a higher rate of interest.

Other expense, net Other expense, net, was $8.0 million in 2018 compared to other expense, net, of $25.5 million in 2017.

In 2018, other expense, net, included a loss of extinguishment of debt of $2.3 million associated with the redemption of the Company’s senior secured term loan facility due 2021 and asset-based revolving credit facility (see note 8 to the Company’s consolidated financial statements), foreign currency transaction losses of $4.4 million and penalty charges of $1.1 million.

In 2017, other expense, net, included an impairment charge of $2.8 million, a loss of extinguishment of debt of $20.7 million associated with the redemption of the Company’s 2022 Notes (see note 8 to the Company’s consolidated financial statements), and foreign currency transaction losses of $2.3 million.

Income tax expense The Company recorded income tax expense of $13.7 million in 2018 compared to income tax expense of $99.7 million in 2017. The Company’s effective tax expense rate was 5.4% in 2018, compared to an effective tax rate of 54.0% in 2017.

The decrease in the effective tax rate in 2018 from 2017 reflects several factors. The decrease in the effective rate is primarily due to the reduction in the U.S. corporate tax rate from 35% in 2017 to 21% in 2018. Additionally, in 2018, the Company recorded a $25.1 million benefit related to foreign tax credit generation and a $9.4 million benefit related to a dividend received

deduction based on a restructuring to simplify its legal entity structure. In 2017, the effective tax rate increased due to the recognition of the one-time mandatory repatriation transition tax of $73.0 million on the net accumulated earnings and profits of the Company’s foreign subsidiaries and $4.0 million of incremental tax related to no longer asserting that a significant portion of the Company’s undistributed earnings are considered indefinitely invested overseas. The increase was partially offset by the remeasurement of the U.S. deferred taxes of $10.3 million to reflect the lower U.S. federal tax rate.

The $9.4 million tax benefit for the dividends received deduction was based on the Company’s assessment of the treatment under the provisions of the Tax Cuts and Jobs Act. Congress or the Department of Treasury may provide legislative or regulatory updates which would change the Company’s assessment. If legislative or regulatory updates are issued related to this item, the timing of which is uncertain, the Company may be required to recognize additional tax expense up to the full amount of the $9.4 million in the period such updates are issued.

Net income Net income was $240.8 million, or $1.69 per diluted share, in 2018 compared to net income of $85.1 million, or $0.59 per diluted share, in 2017. The decrease reflects the Company’s aforementioned operating results described in greater detail above.

Non-GAAP Measures Information The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. See “Non-GAAP Information” included below in this section for additional detail, including the reconciliation of GAAP measures to the Company’s non-GAAP measures.

The Company’s non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA increased 22% to $436.1 million in 2018, compared to $357.1 million in 2017. Adjusted EBITDA, as a percent of net sales, was 28.1% in 2018 compared to 26.6% in 2017. Adjusted Operating Income increased 24% to $371.0 million in 2018, compared to $298.9 million in 2017. Adjusted Operating Income, as a percent of net sales, was 23.9% in 2018 compared to 22.3% in 2017. Non-GAAP Earnings Per Share increased 31% to $1.89 in 2018, compared to $1.44 in 2017. The improvement in the Adjusted EBITDA and Adjusted Operating Income reflect the increase in net sales and related increase in gross profit. In addition, Non-GAAP Earnings Per Share was positively affected by a lower adjusted effective tax rate.

Segment Analysis

The Company reports its financial performance based on three reporting segments. See note 16 to the consolidated financial statements for additional information on the Company’s three segments.

The following table and discussion concern the results of operations of the Company’s three reportable segments for the years ended December 31, 2018 and 2017.

(In thousands)

2018

2017

Specialty Chemicals and Engineered Materials

Net sales

$

530,241

$

485,470

Segment profit

129,754

111,802

Microcontamination Control

Net sales

$

552,844

$

436,225

Segment profit

173,964

141,413

Advanced Materials Handling

Net sales

$

467,412

$

420,837

Segment profit

82,541

59,838

Specialty Chemicals and Engineered Materials (SCEM)

For the year ended December 31, 2018, SCEM net sales increased to $530.2 million, up 9%, from $485.5 million in the comparable period last year. The sales increase primarily reflects strong product sales for specialty gases and specialty materials.

SCEM reported a segment profit of $129.8 million for the year ended December 31, 2018, up 16%, compared to a $111.8 million segment profit in the year-ago period. The increase in the SCEM’s profit in 2018 was primarily due to increased sales, partially offset by higher operating expenses of 8% mainly due to higher employee costs and R&D spending.

Microcontamination Control (MC)

For the year ended December 31, 2018, MC net sales increased to $552.8 million, up 27%, from $436.2 million in the comparable period last year. The sales increase primarily reflects strength in photolithography applications, liquid chemistry

filters for wet, etch and clean driven by strong industry tool shipments, and the acquisition of SPG in the second quarter of 2018, which contributed $62.4 million of sales.

MC reported a segment profit of $174.0 million for the year ended December 31, 2018, up 23%, compared to a $141.4 million segment profit in the year-ago period. The increase in MC’s profit in 2018 reflects increased sales, partially offset by higher operating expenses of 21%, primarily due to higher employee costs, increased R&D spending and SPG operating infrastructure.

Advanced Materials Handling (AMH)

For the year ended December 31, 2018, AMH net sales increased 11% to $467.4 million, from $420.8 million in 2017. The increase primarily reflects strong sales of fluid handling products and liquid packaging and dispense products, and the acquisition of PSS in the first quarter of 2018, which contributed $16.0 million of sales.

AMH reported a segment profit of $82.5 million for the year ended December 31, 2018, up 38% compared to a $59.8 million segment profit in the year-ago period. The increase in the AMH’s profit in 2018 was due to higher sales, partially offset by a 9% increase in operating expenses primarily related to higher employee costs and the absence of $7.1 million of impairment and severance related to organizational realignment from 2017.

Unallocated general and administrative expenses

Unallocated general and administrative expenses for the year ended December 31, 2018 totaled $31.4 million compared to $27.2 million for the year ended December 31, 2017. The $4.2 million increase mainly reflects the deal and integration costs of $8.4 million in the discussion of SG&A above, partially offset by $3.9 million impairment charges related to certain acquired intangible assets recorded in 2017.

The following table sets forth the results of operations and the relationship between various components of operations, stated as a percent of net sales, for the years ended December 31, 2017 and 2016. The Company’s historical financial data was derived from its consolidated financial statements and related notes included elsewhere in this annual report.

(Dollars in thousands)

2017

2016

% of net sales

% of net sales

Net sales

$

1,342,532

100.0

%

$

1,175,270

100.0

%

Cost of sales

733,547

54.6

666,579

56.7

Gross profit

608,985

45.4

508,691

43.3

Selling, general and administrative expenses

216,194

16.1

201,901

17.2

Engineering, research and development expenses

106,951

8.0

106,991

9.1

Amortization of intangible assets

44,023

3.3

44,263

3.8

Operating income

241,817

18.0

155,536

13.2

Interest expense

32,343

2.4

36,846

3.1

Interest income

(715

)

(0.1

)

(318

)

—

Other expense (income), net

25,458

1.9

(991

)

(0.1

)

Income before income taxes and equity in net loss of affiliate

184,731

13.8

119,999

10.2

Income tax expense

99,665

7.4

22,852

1.9

Net income

$

85,066

6.3

$

97,147

8.3

Net sales For the year ended December 31, 2017, net sales were $1,342.5 million, up $167.3 million, or 14%, from sales for the year ended December 31, 2016. An analysis of the factors underlying the increase in net sales is presented in the following table:

(In thousands)

Net sales in 2016

$

1,175,270

Organic growth associated with volume and pricing

164,505

Increase associated with liquid filtration product line acquisition

3,643

Decrease associated with effect of foreign currency translation

(886

)

Net sales in 2017

$

1,342,532

The Company’s sales increase was due to strong across-the-board demand for the Company’s products from semiconductor industry customers, reflecting both higher industry fab utilization and semiconductor industry capital spending compared to the year-ago period. This sales increase reflected improved sales of gas microcontamination filters, liquid chemistry filtration solutions and certain specialty materials products. Exclusive of the sales of the acquired liquid filtration product line of $3.6 million of revenue for 2017 and the unfavorable currency translation effects of $0.9 million for the year, mainly due to the weakening of the Japanese yen relative to the U.S. dollar, the Company’s sales grew 14% in 2017 when compared to 2016.

On a geographic basis, in 2017, total sales to Taiwan were 22%, to North America were 21%, to South Korea were 16%, to Japan were 13%, to China were 11%, to Europe were 9% and to Southeast Asia were 8%. In 2016, total sales to Taiwan were 25%, to North America were 22%, to Japan were 13%, to South Korea were 12%, to China were 10%, to Europe were 9%, and to Southeast Asia were 9%. From 2016 to 2017, net sales to customers in South Korea, China, Europe, North America, Japan and Southeast Asia increased 49%, 26%, 14%, 13%, 9%, and 6%, respectively, while net sales to customers in Taiwan were down 1%.

Demand drivers for the Company’s business primarily consist of semiconductor fab utilization and production (unit-driven) as well as capital spending for new or upgraded semiconductor fabrication equipment and facilities (capital-driven). The Company analyzes sales of its products by these two key drivers. Sales of unit-driven products represented 74% of total sales and sales of capital-driven products represented 26% of total sales in 2017. This compares to a unit-driven to capital-driven ratio of 76%:24% for 2016.

Gross profit Gross profit for 2017 increased by $100.3 million, to $609.0 million, an increase of 20% from $508.7 million for 2016. The gross margin rate for 2017 was 45.4% versus 43.3% for 2016. The gross profit and gross margin improvements reflect the improved factory utilization associated with strong sales levels, a slightly favorable sales mix and the absence of the qualification and start-up costs incurred at the Company’s i2M center in the prior year period. These factors were partly offset by modest price erosion for certain products in response to normal competitive pressures. In addition, the gross profit and gross margin figures include impairment charges of $6.1 million and $6.3 million for the years ended December 31, 2017 and 2016, respectively, related to equipment-related and severance charges.

Selling, general and administrative expenses

Selling, general and administrative expense (SG&A) consists primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and sales and marketing costs. SG&A expenses for 2017 increased $14.3 million, or 7%, to $216.2 million from $201.9 million in 2016. SG&A expenses, as a percent of net sales, decreased to 16.1% from 17.2% a year earlier, reflecting the increase in net sales.

An analysis of the factors underlying the increase in SG&A is presented in the following table:

(In thousands)

Selling, general and administrative expenses in 2016

$

201,901

Employee costs

7,455

Impairment charge related to acquired intangible assets

3,866

Other increases, net

2,972

Selling, general and administrative expenses in 2017

$

216,194

Engineering, research and development expenses

Engineering, research and development (ER&D) expenses related to the support of current product lines and the development of new products and manufacturing technologies was $107.0 million in both 2017 and 2016. ER&D expenses as a percent of net sales were 8.0% compared to 9.1% a year ago, reflecting the increase in net sales.

The Company’s overall ER&D efforts will continue to focus on the support or extension of current product lines, the development of its technologies to create differentiated and high-value products for the most advanced and demanding semiconductor applications and leveraging its unique and diverse technology portfolio to develop innovative, integrated solutions for unmet customer needs. The Company expects ER&D costs to stay relatively stable as a percentage of net sales.

Amortization of intangible assets Amortization of intangible assets was $44.0 million in 2017 compared to $44.3 million for 2016. The decline reflects the absence of amortization expense for certain identifiable trademark intangible assets acquired in the ATMI merger that became fully amortized in early 2017, offset by additional amortization expense from the liquid filtration product line acquisition in 2017.

Interest expense Interest expense was $32.3 million and $36.8 million in the years ended December 31, 2017 and 2016, respectively. Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. The decrease in 2017 reflects lower average outstanding borrowings due to the Company’s payments on the Term Loan in 2017.

Other expense (income), net Other expense, net, was $25.5 million in 2017 compared to other income, net, of $1.0 million in 2016.

In 2017, other expense, net, included an impairment charge of $2.8 million, a loss of extinguishment of debt of $20.7 million associated with the redemption of the Company’s 2022 Notes (see note 7 to the Company’s consolidated financial statements), and foreign currency transaction losses of $2.3 million.

In 2016, other income, net, included foreign currency transaction gains of $0.6 million and other gains of $0.4 million.

Income tax expense The Company recorded income tax expense of $99.7 million in 2017 compared to income tax expense of $22.9 million in 2016. The Company’s effective tax expense rate was 54.0% in 2017, compared to an effective tax rate of 19.0% in 2016.

The increase in the effective tax rate in 2017 from 2016 and the variance in both years from the U.S. statutory rate of 35% reflects several factors. The increase in the effective rate is primarily due to the recognition of the one-time mandatory repatriation transition tax of $73.0 million on the net accumulated earnings and profits of the Company’s foreign subsidiaries and $4.0 million of incremental tax related to no longer asserting that a significant portion of the Company’s undistributed earnings are considered indefinitely invested overseas. This increase was partially offset by the remeasurement of the U.S. deferred taxes for $10.2 million to reflect the lower U.S. federal tax rate and an increase in the federal research and

development tax credit. The effective tax rates in both years reflect a greater concentration in the Company’s geographic composition of income toward jurisdictions with lower tax rates than in the U.S.

Net income Net income was $85.1 million, or $0.59 per diluted share, in 2017 compared to net income of $97.1 million, or $0.68 per diluted share, in 2016. The decrease reflects the Company’s aforementioned operating results described in greater detail above.

Non-GAAP Measures Information The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. See “Non-GAAP Information” included below in this section for additional detail, including the reconciliation of GAAP measures to the Company’s non-GAAP measures.

The Company’s non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA increased 35% to $357.1 million in 2017, compared to $263.7 million in 2016. Adjusted EBITDA, as a percent of net sales, was 26.6% in 2017 compared to 22.4% in 2016. Adjusted Operating Income increased 44% to $298.9 million in 2017, compared to $208.0 million in 2016. Adjusted Operating Income, as a percent of net sales, was 22.3% in 2017 compared to 17.7% in 2016. Non-GAAP Earnings Per Share increased 53% to $1.44 in 2017, compared to $0.94 in 2016. The improvement in the Adjusted EBITDA and Adjusted Operating Income reflect the increase in net sales and related increase in gross profit. In addition, Non-GAAP Earnings Per Share was positively affected by a lower adjusted effective tax rate.

Segment Analysis

The following table and discussion concern the results of operations of the Company’s three reportable segments for the years ended December 31, 2017 and 2016.

(In thousands)

2017

2016

Specialty Chemicals and Engineered Materials

Net sales

$

485,470

$

428,328

Segment profit

111,802

77,328

Microcontamination Control

Net sales

$

436,225

$

362,658

Segment profit

141,413

93,911

Advanced Materials Handling

Net sales

$

420,837

$

384,284

Segment profit

59,838

56,282

Specialty Chemicals and Engineered Materials (SCEM)

For the year ended December 31, 2017, SCEM net sales increased to $485.5 million, up 13%, from $428.3 million in the comparable period last year. The sales increase primarily reflects strong product sales for specialty gases, glass forming products and advanced deposition materials.

SCEM reported a segment profit of $111.8 million for the year ended December 31, 2017 compared to a $77.3 million segment profit in the year-ago period. The increase in the SCEM’s profit in 2017 was primarily due to increased sales, partially offset by higher operating expenses of 5%.

Microcontamination Control (MC)

For the year ended December 31, 2017, MC net sales increased to $436.2 million, up 20%, from $362.7 million in the comparable period last year. The sales increase primarily reflects strength in photolithography applications, gas filter products, and liquid chemistry filters for wet, etch and clean driven by strong industry tool shipments.

MC reported a segment profit of $141.4 million for the year ended December 31, 2017 compared to a $93.9 million segment profit in the year-ago period. The increase in the MC’s profit in 2017 reflects increased sales and the absence of the qualification and start-up costs incurred at the Company’s i2M center in the year-ago period, partially offset by higher operating expenses of 5%.

Advanced Materials Handling (AMH)

For the year ended December 31, 2017, AMH net sales increased 10% to $420.8 million, from $384.3 million in 2016. The increase primarily reflects strong sales of wafer and reticle handling, wafter shipping and fluid handling products.

AMH reported a segment profit of $59.8 million in 2017, up 6% from $56.2 million in 2016. The increase in the AMH’s profit in 2017 was due to higher sales, partially offset by a 6% increase in operating expenses. Results in 2017 include impairment and severance charges of $7.5 million compared to $6.8 million a year ago.

Unallocated general and administrative expenses

Unallocated general and administrative expenses for the year ended December 31, 2017 totaled $27.2 million compared to $27.7 million for the year ended December 31, 2016. Results in 2017 include a $3.9 million impairment charge related to certain acquired intangible assets.

The following table presents selected data from the Company’s consolidated statements of operations for the eight quarters ended December 31, 2018. This unaudited information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this annual report. All adjustments that management considers necessary for the fair presentation of the unaudited information have been included in the quarters presented.

QUARTERLY STATEMENTS OF OPERATIONS DATA

2017

2018

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

(In thousands)

Net sales

$

317,377

$

329,002

$

345,591

$

350,562

$

367,199

$

383,059

$

398,597

$

401,642

Gross profit

139,596

150,303

155,407

163,679

175,997

182,378

181,716

179,740

Selling, general and administrative expenses

50,492

52,985

57,699

55,018

58,269

65,200

62,358

60,707

Engineering, research and development expenses

27,239

27,221

26,002

26,489

27,586

30,231

29,964

30,675

Amortization of intangible assets

10,945

11,007

11,051

11,020

11,669

12,014

21,419

17,050

Operating income

50,920

59,090

60,655

71,152

78,473

74,933

67,975

71,308

Net income (loss)

32,514

39,991

40,902

(28,341

)

57,562

54,349

48,060

80,784

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

(Percent of net sales)

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Gross profit

44.0

45.7

45.0

46.7

47.9

47.6

45.6

44.8

Selling, general and administrative expenses

15.9

16.1

16.7

15.7

15.9

17.0

15.6

15.1

Engineering, research and development expenses

8.6

8.3

7.5

7.6

7.5

7.9

7.5

7.6

Amortization of intangibles

3.4

3.3

3.2

3.1

3.2

3.1

5.4

4.2

Operating income

16.0

18.0

17.6

20.3

21.4

19.6

17.1

17.8

Net income (loss)

10.2

12.2

11.8

(8.1

)

15.7

14.2

12.1

20.1

The Company’s quarterly results of operations have been, and will likely continue to be, subject to significant fluctuations due to a myriad of factors, many of which are beyond the Company’s control. The variability in sales, and its corresponding effect on gross profit, are generally the most important factors underlying the changes in the Company’s operating income and net income over the past eight quarters.

Liquidity and Capital Resources

The Company has historically financed its operations and capital requirements through cash flow from its operating activities, long-term loans, lease financing and borrowings under domestic and international short-term lines of credit. In fiscal 2000 and 2009, the Company raised capital via public offerings of its common stock.

Operating activities

Net cash flow provided by operating activities totaled $312.6 million for the year ended December 31, 2018. Cash generated by the Company’s operations included net income of $240.8 million, as adjusted for the impact of various non-cash charges, most notably depreciation and amortization of $127.3 million, and share-based compensation expense of $17.1 million. These operating cash flows were partly offset by changes in operating assets and liabilities, mainly due to an increase in accounts receivables and inventories, an increase in accounts payable and accrued liabilities, and an offset in income taxes payable and refundable income taxes.

Working capital was $759.7 million at December 31, 2018, which included $482.1 million in cash and cash equivalents, a decrease from $766.6 million as of December 31, 2017, which included $625.4 million in cash and cash equivalents.

Accounts receivable increased by $38.6 million during 2018, or $17.5 million after accounting for the effect of foreign currency translation and acquisitions. The net increase reflects the year-over-year increase in fourth quarter sales of the Company’s products. The Company’s days sales outstanding measure (DSO) stood at 50 days at December 31, 2018 compared to 48 days at the beginning of the year.

Inventories at December 31, 2018 increased by $70.1 million from a year earlier, or $38.1 million after accounting for foreign currency translation, acquisitions and the provision for excess and obsolete inventory. The net increase reflects higher levels of all categories of inventory, due to higher sales and production activity.

Accounts payable and accrued liabilities were $65.9 million higher than a year ago, or $20.0 million higher after accounting for the effect of foreign currency translation and acquisitions. The increase reflects higher accounts payable associated with increased levels of business activity and higher accrued bonuses in 2018.

Investing activities Cash flow used in investing activities totaled $485.9 million in 2018.

Acquisition of property and equipment totaled $110.2 million, which primarily reflected investments in equipment and tooling. Capital expenditures in 2018 generally reflected more normalized capital spending levels. The Company expects its capital expenditures in 2019 to be approximately $110 million.

On January 22, 2018, the Company acquired PSS, which provides particle sizing instrumentation for liquid applications to the semiconductor and life science industries. The total purchase price of the acquisition was approximately $37.3 million in cash, funded from the Company’s existing cash on hand. The transaction is described in further detail in note 3 to the Company’s consolidated financial statements.

On June 25, 2018, the Company acquired the SPG business. SPG is a leading provider of high-capacity gas purification systems used in semiconductor manufacturing and adjacent markets. The total purchase price of the acquisition was approximately $352.7 million in cash or $341.5 million net of cash received, subject to revision for customary working capital adjustments. The transaction is described in further detail in note 3 to the Company’s consolidated financial statements.

The Company previously had (a) a senior secured term loan facility maturing April 30, 2021 (the “Previous Term Loan Facility”) that provided financing of $460 million and (b) a senior secured asset-based revolving credit facility maturing April 30, 2019 (the “ABL Facility” and together with the Previous Term Loan Facility, the “Previous Credit Facilities”) that provided financing of $75 million, subject to a borrowing base.

On November 6, 2018, the Company obtained a new $700 million senior secured credit facility, consisting initially of (a) term loans in an aggregate principal amount of $400 million (the “New Term Loan Facility”) and (b) revolving commitments in an aggregate amount of $300 million (the “New Revolving Facility”, and together with the New Term Loan Facility, the “New Credit Facilities”). The New Term Loan Facility matures November 6, 2025 and the New Revolving Facility matures November 6, 2023. Borrowings under the New Credit Facilities bear interest at a rate per annum equal to, at the Company’s option, a base rate (such as prime rate or LIBOR) plus, an applicable margin. The Company may voluntarily prepay outstanding term loans under the New Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans, provided, however, that if on or prior to May 6, 2019 the Company prepays any term loan in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00% of the aggregate principal amount of the term loans so prepaid. The Company may voluntarily reduce the unutilized portion of the New

Revolving Facility and repay outstanding revolving loans under the New Revolving Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. The Company used approximately $109 million of the proceeds of the term loans under the New Term Loan Facility to repay and terminate its Previous Credit Facilities. As of December 31, 2018, the New Term Loan Facility was fully drawn at closing and the Company had no outstanding borrowings and $0.2 million undrawn outstanding letters of credit under the New Revolving Facility.

Through December 31, 2018, the Company was in compliance with all applicable financial covenants included in the terms of its credit facilities.

The Company also has lines of credit with two banks that provide for borrowings of Japanese yen for the Company’s Japanese subsidiary equivalent to an aggregate of approximately $10.9 million. There were no outstanding borrowings under these lines of credit at December 31, 2018.

In addition, the Company repurchased shares of the Company’s common stock during 2018 at a total cost of $173.8 million under the stock repurchase program authorized by the Company’s Board of Directors. During 2018, the Company’s Board of Directors declared a cash dividend of $0.07 per share during the first, second, third and fourth quarters of 2018, which totaled $39.8 million. The Company paid $14.7 million for taxes related to the net share settlement of equity awards, offset by proceeds received of $5.6 million in connection with common shares issued under the Company’s stock plans.

At December 31, 2018, the Company’s shareholders’ equity stood at $1,012.0 million, up 2% from $993.0 million at the beginning of the year. The 2018 increase reflects net income of $240.8 million, additional paid-in capital of $17.1 million associated with the Company’s share-based compensation expense and these increases to shareholders’ equity were partly offset by cash dividends paid of $39.8 million, the repurchase and retirement of the Company’s stock of $179.3 million and favorable foreign currency translation effects of $10.2 million mainly associated with the strengthening of the U.S. dollar versus the Korean won.

As of December 31, 2018, the Company’s sources of available funds were its cash and cash equivalents of $482.1 million, funds available under the New Revolving Facility and international credit facilities and cash flow generated from operations. As of December 31, 2018, the amount of cash and cash equivalents held in certain of our foreign operations totaled approximately $180.1 million. As of December 31, 2018, we had not repatriated any of these funds to the U.S. However, to the extent we repatriate these funds to the U.S., we will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. We have accrued taxes for the tax effect of repatriating the funds to the U.S.

The Company believes its existing balances of domestic cash and cash equivalents and operating cash flows will be sufficient to meet the Company’s domestic cash needs arising in the ordinary course of business for the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all.

New Accounting Pronouncements

Recently adopted accounting pronouncements Refer to note 1 to the Company’s consolidated financial statements for a discussion of accounting pronouncements implemented in 2018. Other than the adoption of ASU 2014-09, there were no recently issued accounting pronouncements adopted in 2018.

Recently issued accounting pronouncements Refer to note 1 of the Company’s consolidated financial statements for a discussion of accounting pronouncements recently issued but not yet adopted.

Contractual Obligations

The following table summarizes the maturities of the Company’s significant financial obligations as of December 31, 2018:

(In thousands)

Total

2019

2020

2021

2022

2023

Thereafter

Long-term debt1

$

950,000

$

4,000

$

4,000

$

4,000

$

4,000

$

4,000

$

930,000

Interest2

302,267

43,518

43,337

43,156

42,975

42,794

86,487

Pension obligations

6,473

36

33

217

201

251

5,735

Capital lease obligations

5,250

1,000

1,000

1,000

1,000

1,000

250

Capital purchase obligations3

30,668

30,668

—

—

—

—

—

Operating leases

64,894

11,360

8,906

6,836

5,431

5,208

27,153

Total

$

1,359,552

$

90,582

$

57,276

$

55,209

$

53,607

$

53,253

$

1,049,625

Unrecognized tax benefits4

1Debt obligations are classified based on their stated maturity date, regardless of their classification on the Company’s consolidated balance sheets.

2Interest projections on both variable and fixed rate long-term debt are based on interest rates effective as of December 31, 2018 and do not include $11.1 million for net unamortized discounts and debt issuance costs.

3Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on the Company’s consolidated balance sheet as of December 31, 2018, as the Company had not yet received the related goods or taken title to the property.

4The Company had $12.3 million of total gross unrecognized tax benefits at December 31, 2018. The timing of any payments associated with these unrecognized tax benefits will depend on a number of factors. Accordingly, the Company cannot make reasonably reliable estimates of the amount and period of potential cash settlements, if any, with taxing authorities and are not included in the table above.

Non-GAAP Information The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP).

The Company also provides certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other regulations under the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. The Company provides non-GAAP financial measures of Adjusted EBITDA and Adjusted Operating Income together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA, a non-GAAP term, is defined by the Company as net income before (1) income tax expense, (2) interest expense (3) interest income (4) other expense (income), net, (5) charge for fair value write-up of acquired inventory sold, (6) deal costs, (7) integration costs, (8) severance related to organization realignment (9) impairment of equipment and intangibles, (10) loss on sale of subsidiary, (11) amortization of intangible assets and (12) depreciation. Adjusted Operating Income, another non-GAAP term, is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company’s net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.

Non-GAAP EPS, a non-GAAP term, is defined by the Company as net income before (1) charge for fair value write-up of inventory sold (2) deal costs (3) integration costs, (4) severance related to organizational realignment, (5) impairment of equipment and intangibles, (6) loss on debt extinguishment (7) loss on sale of subsidiary, (8) gain on sale of short-term investment (9) amortization of intangible assets, (10) the tax effect of those adjustments to net income and discrete tax items (11) the tax effect of legal entity restructuring and (12) the Tax Cuts and Jobs Act.

The Company provides supplemental non-GAAP financial measures to better understand and manage its business and believes these measures provide investors and analysts additional and meaningful information for the assessment of the Company’s ongoing results. Management also uses these non-GAAP measures to assist in the evaluation of the performance of its business segments and to make operating decisions.

Management believes the Company’s non-GAAP measures help indicate the Company’s baseline performance before certain gains, losses or other charges that may not be indicative of the Company’s business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors’ overall understanding of the Company’s results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans, measures and evaluates the Company’s business performance. Management believes that the inclusion of non-GAAP measures provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.

Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand its business.

In addition, and as a consequence of the importance of these non-GAAP financial measures in managing its business, the Company’s Board of Directors uses non-GAAP financial measures in the evaluation process to determine management compensation.

The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company’s industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company’s creditworthiness.

The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s consolidated financial statements in their entirety and to not rely on any single financial measure.

Management notes that the use of non-GAAP measures has limitations:

First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other companies. For example, the Company’s non-GAAP measure of Adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.

Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant

recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.

Third, there is no assurance the Company will not have future restructuring activities, gains or losses on sale of equity investments, contingent consideration fair value adjustments or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items from the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.

Management considers these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financial measures and evaluating these non-GAAP financial measures together with their most directly comparable financial measures calculated in accordance with GAAP. The calculations of Adjusted EBITDA, Adjusted operating income, and non-GAAP EPS, and reconciliations between these financial measures and their most directly comparable GAAP equivalents are presented below in the accompanying tables.

The reconciliation of GAAP measures to Adjusted Operating Income and Adjusted EBITDA for the years ended December 31, 2018, 2017 and 2016 are presented below:

In thousands

2018

2017

2016

Net sales

$

1,550,497

$

1,342,532

$

1,175,270

Net income

$

240,755

$

85,066

$

97,147

Adjustments to net income

Income tax expense

13,677

99,665

22,852

Interest expense

34,094

32,343

36,846

Interest income

(3,839

)

(715

)

(318

)

Other expense (income), net

8,002

25,458

(991

)

GAAP – Operating income

292,689

241,817

155,536

Charge for fair value write-up of acquired inventory sold

6,868

—

—

Deal costs

5,121

—

—

Integration costs

3,237

—

—

Severance related to organizational realignment

460

2,700

2,405

Impairment of equipment and intangibles 1

—

10,400

5,826

Loss on sale of subsidiary

466

—

—

Amortization of intangible assets

62,152

44,023

44,263

Adjusted operating income

370,993

298,940

208,030

Depreciation

65,116

58,208

55,623

Adjusted EBITDA

$

436,109

$

357,148

$

263,653

Adjusted operating margin

23.9

%

22.3

%

17.7

%

Adjusted EBITDA – as a % of net sales

28.1

%

26.6

%

22.4

%

1Includes product line impairment charges of $5,330 and $5,826 classified as cost of sales for the years ended December 31, 2017 and 2016, respectively.

Includes intangible impairment charge of $3,866 classified as selling, general and administrative expense for the year ended December 31, 2017.

Includes product line impairment charge of $320 classified as selling, general and administrative expense for the year ended December 31, 2017.

Includes product line impairment charge of $884 classified as engineering, research and development expense for the year ended December 31, 2017.

The reconciliation of GAAP measures to Non-GAAP Earnings per share for the years ended December 31, 2018, 2017 and 2016 are presented below:

In thousands, except per share data

2018

2017

2016

Net income

$

240,755

$

85,066

$

97,147

Adjustments to net income:

Charge for fair value write-up of acquired inventory sold

6,868

—

—

Deal costs

5,121

—

—

Integration costs

3,237

—

—

Severance related to organizational realignment

460

2,700

2,405

Impairment of equipment and intangibles1

—

13,200

5,826

Loss on debt extinguishment

2,319

20,687

—

Loss on sale of subsidiary

466

—

—

Gain on sale of short-term investment

—

—

(156

)

Amortization of intangible assets

62,152

44,023

44,263

Tax effect of adjustments to net income and discrete tax items 2

(17,812

)

(26,046

)

(16,637

)

Tax effect of legal entity restructuring

(34,478

)

—

—

Tax effect of Tax Cuts and Jobs Act

683

66,713

—

Non-GAAP net income

$

269,771

$

206,343

$

132,848

Diluted earnings per common share

$

1.69

$

0.59

$

0.68

Effect of adjustments to net income

$

0.20

$

0.85

$

0.25

Diluted non-GAAP earnings per common share

$

1.89

$

1.44

$

0.94

1Includes product line impairment charges of $5,330 and $5,826 classified as cost of sales for the years ended December 31, 2017 and 2016, respectively.

Includes intangible impairment charge of $3,866 classified as selling, general and administrative expense for the year ended December 31, 2017.

Includes product line impairment charge of $320 classified as selling, general and administrative expense for the year ended December 31, 2017.

Includes product line impairment charge of $884 classified as engineering, research and development expense for the year ended December 31, 2017.

Includes product line impairment charge of $2,800 classified as other expense for the year ended December 31, 2017.

2The tax effect of the non-GAAP adjustments was calculated using the applicable marginal tax rate during the respective years.

Item 7A. Quantitative and Qualitative Disclosure About Market Risks

Entegris’ principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company’s interest-bearing cash equivalents and short-term investments are subject to interest rate fluctuations. The Company’s cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately $0.7 million annually.

The cash flows and results of operations of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. At December 31, 2018, the Company had no net exposure to any foreign currency forward contracts.

Item 8. Financial Statements and Supplementary Data.

The information called for by this item is set forth in the Consolidated Financial Statements covered by the Report of Independent Registered Public Accounting Firm at the end of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Based on management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2018, the Company identified a material weakness in internal control related to ineffective risk assessment associated with implementation of certain third party software upgrades and Information Technology (IT) program change controls. As a result of an ineffective software upgrade provided by the software vendor that occurred on December 15, 2018, an automated configuration was changed that affected wire transfer instructions for a one week period and resulted in material expenditures being routed to an unauthorized intermediary bank and vendor payments being recorded in error.

The Company took immediate action when the unauthorized payments were discovered. The expenditures were recovered. Those transactions were corrected and the majority of the vendor payments were subsequently paid by the Company prior to the issuance of these consolidated financial statements.

The Company remediated the material weakness described above as of December 31, 2018, by obtaining the software to correct the automated configuration and enhancing our program change controls related to the third party software upgrade changes affecting our ERP system during 2018, which included monitoring by an external specialist.

Management concluded based on the remediation actions described above that our risk assessment and IT program change controls were designed and implemented effectively as of December 31, 2018.

There were no other changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.

Management assessed our internal control over financial reporting as of December 31, 2018. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

The Company acquired the SAES Pure Gas business (SPG) on June 25, 2018. In the conduct of its assessment of the effectiveness of the Company’s internal control over financial reporting for the year ended December 31, 2018, management has excluded total assets of approximately $434 million and net sales of approximately $62 million related to SPG that are included in the consolidated financial statements of Entegris and its subsidiaries as of and for the year ended December 31, 2018. Management must include SPG in the conduct of its assessment of the effectiveness of the Company’s internal control over financial reporting no later than the second quarter of 2019.

Based on its assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

KPMG LLP, the independent registered public accounting firm which audited the consolidated financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

We have audited Entegris, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 11, 2019 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired SAES Pure Gas during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, SAES Pure Gas’ internal control over financial reporting associated with total assets of $434 million and total revenues of $62 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of SAES Pure Gas.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting” appearing under Item 9A of the Company’s December 31, 2018 Annual Report on Form 10-K . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.